Even in the midst of a prolonged crypto bear market, innovation within the NFT (non-fungible token) space hasn’t slowed down. The era when NFTs were mainly used as online profile pictures or digital bragging rights is quickly evolving.
Today, NFTs are expanding their footprint beyond Ethereum—which initially brought them mainstream thanks to its smart contract capabilities—and onto the Bitcoin blockchain through technologies like Ordinals.
While these advancements include innovations in NFT gaming, updated ERC standards, and new utilities, one of the most intriguing developments is NFT-based lending.
This article is Part I of a two-part series on NFT lending. In this part, we’ll break down how NFT lending works, focusing on how it’s changing financial models and the technology behind it. In Part II, we’ll explore the legal implications for lenders, especially around secured transactions under the U.S. Uniform Commercial Code (UCC), both before and after recent amendments to Articles 9 and 12.
What’s New in NFT Lending?
Just like traditional loans that are backed by collateral, NFT lending allows someone who owns an NFT to borrow money by offering the NFT as security for the loan. This can happen peer-to-peer (between individuals) or peer-to-protocol (using an automated liquidity pool).
These arrangements give NFT holders a way to access liquidity without selling their digital assets. Smart contracts automate the process, defining terms, managing risks, and ensuring enforcement if the borrower defaults.
One major step forward in NFT lending came from Blur, an NFT marketplace and aggregator, which launched a system called Blend—a “perpetual peer-to-peer lending protocol.” Blend offers two main services:
- Buy now, pay later for NFTs
- Borrowing using an NFT you already own as collateral
What makes Blend a breakthrough is how it avoids the weaknesses of earlier systems. Traditional “peer-to-pool” platforms use oracles (external data providers) to assign values and determine loan terms. These oracles are vulnerable to price swings, manipulation, and sudden liquidation if an NFT’s value dips too low.
Blend’s peer-to-peer model allows borrowers and lenders to negotiate directly, providing greater flexibility. Since it doesn’t depend on oracles, Blend can avoid risky automatic liquidations and the manipulation that can come with third-party price feeds.
How Does NFT Lending Work on a Platform Like Blend?
For Lenders
Lenders connect their crypto wallet and fund it with money they’re willing to lend. Rather than choosing a specific NFT, they select a collection and indicate the maximum amount they’re ready to lend against any item from that collection. Since some NFTs are rarer (and more valuable) than others, the loan offer applies broadly, not to individual assets.
Lenders also set a fixed interest rate, then wait for borrowers to take up the offer. They can close the loan and claim interest at any time. When a lender chooses to exit, Blend starts a Dutch auction—beginning at 0% interest and gradually increasing up to 1,000% APR—to attract new lenders.
The borrower can accept the new terms or repay the loan. If no new lender steps in within 6 hours, the borrower gets 24 hours to repay. If they fail, the NFT is liquidated.
For Borrowers
Borrowers also connect a wallet and choose either to buy an NFT on a payment plan or to borrow against an NFT they already own. They browse through loan offers, which are sorted based on interest rates and loan amounts.
Once a borrower accepts an offer, they receive the loan, and the NFT is locked as collateral. These loans are perpetual, meaning they don’t expire. Borrowers can repay anytime in two ways:
- Sell the NFT and repay the loan with interest
- Keep the NFT by repaying the principal and interest directly
However, since lenders can request repayment at any time, borrowers should be cautious. If the NFT’s value drops or the market gets volatile, the lender can trigger a Dutch auction to find a new lender—or else the borrower must repay quickly to avoid liquidation.
Why NFT Lending Matters
NFT-based lending is more than just a new financial tool. It represents the next phase of Web3 finance, bringing more functionality and value to digital assets. It gives NFT holders liquidity without selling their collectibles and creates new ways for investors to earn yield.
By blending traditional secured lending concepts with smart contract automation, protocols like Blend are transforming how digital assets are used in financial transactions.
What’s Next?
While the technology is rapidly evolving, legal clarity is still catching up. That’s where Part II comes in. It will focus on the legal side of NFT lending, especially the complexities of secured transactions under the Uniform Commercial Code (UCC)—both before and after important amendments to Articles 9 and 12.
These legal frameworks determine how digital assets like NFTs can be used as collateral and what rights lenders have if a borrower defaults. We’ll also look at how the law is adapting to emerging issues such as digital ownership, smart contract enforcement, and cross-jurisdiction lending.
Stay tuned for Part II, where we’ll break down these critical legal questions in detail.
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