NFTs Go Into the Blender
A Comprehensive Breakdown of Blend & What it Means
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Today we are diving deep into Blur Lending (Blend), the shiny new Peer-to-Peer lending protocol Blur announced yesterday. Last week, in our PRO newsletter, we talked about how the NFT market is experiencing a change into a more mature financial market (for better and worse) thanks to Blur. So it is great timing to continue that conversation with Blend, which is accelerating that trend by offering leverage at a scale not seen before.
As of this writing, there have already been 880+ loans accepted and 9,000+ ETH loaned in the 2 days since Blend launched.
The reaction to Blend is best summarized as a ~blend~ ;) of serious concerns and a celebration of a new market paradigm.
So what are they doing?
While there are many technical nuances that Blend has introduced to P2P lending, which we’ll dive into here, the main throughline is that Blur is doing what they do best: Removing friction from a clunky and inefficient market by providing superior UX and token incentives.
Blend offers leverage to borrowers in two ways:
Buy Now, Pay Later (BNPL) - This is the mortgage model, which allows those who do not own the NFT to buy an NFT with just a downpayment.
Borrow against an NFT - This caters to those who already own the NFTs, and want to get ETH liquidity without selling it, similar to taking a home equity loan or line of credit.
Some important aspects about Blend to know are:
All loans are peer-to-peer (P2P) loans instead of Peer-to-Pool
The P2P model takes away the need for oracle pricing for liquidations, since each loan has preset terms between the lender and borrower. This means when a loan is created, it is not affected directly by the movement of market floor prices. Repayment terms, defaults, and refinancing all are set and negotiated within the loan, between the borrower and lender.
Pooled lending models like Bend DAO, although capital efficient, depend on oracle prices to establish NFT market values and manage liquidations. This approach restricts the choices available to borrowers and lenders, potentially leading to instant liquidations. Furthermore, it fails to consider NFT rarity since it only follows floor prices, leaving the system open to manipulation by large investors in less liquid collections.
Loans have no expiration
This is a major change from traditional NFT loans (or loans in general).
Traditionally, every P2P loan has a maturity date, with options to refinance or “roll” their loans into new loans with other willing lenders. But Blur removed that (citing unnecessary on-chain gas costs) and put the onus on the lenders and borrowers to decide when the loans should be closed or refinanced.
Blur is relying on their deep liquidity to automatically roll/refinance loans in perpetuity. The thinking is: as long as lenders are willing to lend against a collection of NFTs, lenders who want to exit their position can simply hand off the loan to another lender, and if it all happens on Blur, they won’t even need to waste gas to make this rollover transaction.
24 hours after a loan originates, lenders can trigger an option to exit the loan position by opening up a dutch auction. In this event, a couple things can happen:
The lender can offload this loan to another loan offer, which means a new lender pays back the original lender the principal + interest owed. Then a new loan (and 24 hour penalty period) begins. In this scenario, the borrower is never involved (which is very similar to how mortgage lenders in real estate resell their mortgages amongst themselves all the time).
If the above lender cannot find a new lender to take the loan, then the buyer has 30 hours to repay the loan, or else they forfeit the NFT.
$BLUR token incentives
Much like bidding incentives, Blur is incentivizing folks to use their Blend product. Lenders are rewarded with Lending points while their ETH is offered for loans. The higher the ETH they are willing to risk, and the lower the APY they offer, the more points they accrue.
Once the offer is accepted, they stop accruing $BLUR. This has caused concerns in the market that lenders have a high incentive to liquidate loans ASAP in order to get their ETH back to farm more BLUR tokens.
When lending is enabled on a collection, the Listing points incentives are disabled. This may lead to less incentive for holders to list their NFTs for sale near the floor price, which may cause the floor to thin. A thin floor can lead to more pumps in the collections, as it takes fewer buys for whales to move the floor price higher.