NFT and defi doesn't communicate, and it's weird. Actually, not so much. Having been around these two crowds IRL, I can see why there isn't a great deal of overlap online.

Defi people are more intellectual and based in true development. These are the guys that know their stuff and still tend to believe in the notion of decentralization and privacy — the stuff that crypto was made to protect.

The NFT crowd isn't so technical. As the beneficiaries of much of crypto tech, they are much more interested in getting back to fiat as quickly as possible. Their founders are more cynical and much less concerned with the political implications of crypto. Sucks, because it seems as though NFTs are going to be the thing that brings in most of the masses.

But there's no reason you shouldn't be able to use these two ideas together. I have. The idea is simple: Using relatively stable NFTs as collateral to get liquidity to make money in defi.

[A note: There's a platform called NFTfi that can do exactly this, but I'll also refer to the idea of NFTs + defi as "nftfi" (all lowercase).]

Why Use NFTs as Collateral?

Stable NFTs with communities and utility (BAYC, Proof Collective, Doodles) tend to serve as a hedge against ETH in bear markets. Because the NFT crowd thinks in fiat, not crypto, prices of NFTs go up in ETH if ETH goes down in price. This creates a more stable pool for collateral than using even BTC or ETH in a bear market.

NFTfi

Actually, the fiat value of your collateral only matters if there is a chance of liquidation. On the NFTfi platform, there is no chance of liquidation. The platform is P2P, so the system doesn't need to rely on an automated market making process to determine an asset's true value. If the process of collateralization was automated, like it is on Aave or Compound, liquidation becomes necessary to protect the platform against falling asset prices. On NFTfi, the value is set by the amount of money individuals are prepared to lend. This is a huge advantage in some cases.

The downside is that loans on NFTfi have a time limit. Usually. So if your terms say 30 days for payback, and you don't pay back in 30 days, you lose the NFT. But this is a better kind of liquidation risk, because it relies solely on my ability to pay the loan back. Which I'm very happy to rely on rather than the market.

An added benefit: If the floor completely drops out from a collection, you just don't pay the loan back. This has happened many times to me with Gen1 NFT projects like Supducks and Mekaverse that just lost momentum. I actually came out ahead because I borrowed more than the floor price dropped to.

The time limit actually isn't that much of an issue now since the platform added a negotiation feature. If you have a personal relationship with your lender, which you can easily cultivate through the project Discord, you can definitely work out terms that are advantages to you both. Although I'm a big fan of automated market making, this is one instance when peer to peer negotiation actually wins out.

There are other platforms that have tried to create a platform to use NFTs as collateral. However, they are all trying for an automated market making, which means there is potential for liquidation should the floor price of a collection fall precipitously. Because of the small markets each NFT project has, these platforms are ripe for gamesmanship. It would only take one whale to completely trash the floor price of a mid tier NFT collection, collect all of the liquidated NFTs, and immediately push the floor price back up.

nftfi

As long as you stay away from those half-baked automated market maker NFT platforms, you can really take advantage of the NFT plus defi (nftfi) strategy that has been so good to me for the past two years. This strategy works in bull and bear markets because NFTs are a hedge on downward ETH prices in bear markets, as stated before.

The name of the game is borrowing on your NFT and using that liquidity in defi to yield farm or speculate successfully. Even if you are not necessarily successful, you have the ability to pay back your loan and try again. You also get to retain the NFT, so if someone goes on a buying spree and raises the floor price, you don't get locked out of ownership. When you pay your loan back and your NFT returns to your wallet, you are now the beneficiary of this new, much higher floor price. (That means you can borrow more or sell for a profit!)

Do keep in mind that your NFT is locked in an escrow contract while you are borrowing on it. This means that any airdrops you would receive for holding the NFT will not go to you. The way to get around this is to time you're borrowing. The best time is just after an airdrop occurs but before the price of the NFT collection dips. That way, you get maximum liquidity without giving up any of the benefits of holding.

Let me know if this strategy works for you or if you have any questions about it! This does involve an understanding of quite a few platforms, so don't take this strategy on until you fully understand all of the moving parts.

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