NFT-Fi, comprising NFT lending and NFT derivatives, is widely regarded as the next frontier in the evolution of NFTs. In a previous discussion, we examined NFT derivatives like Gumball and Wasabi; today, we will shift our attention to NFT lending, with a particular focus on ParaSpace, the leading NFT lending protocol. Despite the recent attack, which was averted by BlockSec, the platform continues to play a vital role in the NFT lending ecosystem.
ParaSpace, a decentralized lending platform, empowers users to borrow and lend using both Non-Fungible Tokens (NFTs) and Fungible Tokens. By tapping into previously unused capital, ParaSpace enables users to simultaneously fund new investments and earn attractive yields.
Offering solutions that boost value, liquidity, and capital efficiency, ParaSpace caters to a rapidly expanding market. With a diverse range of products supporting on-chain financial assets, art, collectibles, gaming, and more, ParaSpace provides a comprehensive platform for users to discover new investment opportunities and generate higher returns.
ParaSpace addresses three major challenges in the NFT landscape:
- Capital inefficiency for idle NFTs and FTs, which can result in opportunity cost concerns.
- Restricted collateral support in current lending solutions, limiting users from employing various collateral types and tailoring their borrowing and lending based on their unique risk preferences.
- Elevated entry barriers for blue-chip NFTs, hindering average investors from accessing the market and capitalizing on the potential value of these assets.
NFT Borrowing and Lending
ParaSpace utilizes a peer-to-pool architecture that allows users to provide their NFTs and ERC-20 tokens as collateral and borrow other ERC-20 tokens against them. In doing so, users have the opportunity to earn returns on their NFTs without needing to sell them. ParaSpace currently supports over 10 blue-chip NFTs and UniV3 LP as collateral. The maximum amount that can be borrowed is determined by the weighted collateral factor of the assets supplied. Users can withdraw their assets from the platform as long as they do not exceed the borrowing limit.
ParaSpace provides Bored Ape series holders the opportunity to stake and borrow against their NFTs in order to maximize their ApeCoin staking yields. The platform also supports peer-to-peer staking for those who prefer an alternative method to enhance their staking rewards.
ParaSpace tackles two primary challenges in the market: eligible NFT holders often lack sufficient ApeCoin to optimize their yields, and official staking contracts do not auto-compound staking returns. ParaSpace addresses both concerns and significantly increases effective returns, thereby improving capital efficiency.
Buy and Bid with Credit
ParaSpace enables users to purchase and bid on NFTs using credits generated from collateralizing assets. These credits can be used to buy NFTs listed on OpenSea and LooksRare or to send purchase offers to any NFT supplied within the ParaSpace protocol. Available credits are calculated based on current collateralized positions and future credit potential. Leverage buying on an NFT is also possible through flashloans, allowing users to acquire NFTs with borrowed assets. This is essentially a BNPL (buy now, pay later) system.
Despite being an NFT lending protocol, ParaSpace has 70% of its total value locked (TVL) in ERC-20 tokens.
As a newly launched protocol, user growth is progressing well. However, compared to the DeFi market, NFT-Fi is still a very niche market.
The above table demonstrates the dominance of NFT lending on ParaSpace. Unsurprisingly, BAYC and MAYC account for 90% of the NFT value distribution.
Another interesting table shows that more than half of the BNPL transactions are related to MAYC. This indicates that MAYC is the preferred choice among all the blue-chip NFTs when utilizing BNPL. Although its entry price is lower compared to BAYC and CryptoPunk, it still holds high value among other blue-chip assets.
ParaSpace positions itself as a one-stop-shop for everything related to NFTs, covering NFT lending, marketplaces, and Apecoin staking. In addition, ParaSpace plans to support Aave’s aTokens and Compound’s cTokens. With the upcoming Shanghai upgrade, it is also exploring LSD. It remains to be seen if this model will be sustainable. Typically, protocols start by leading in one area and then expand horizontally or vertically, such as Uniswap expanding into NFTs and Curve into stablecoins.
By offering NFT borrowing and lending, as well as Apecoin staking, ParaSpace has found a niche market and provides value to both Bored Ape NFT series holders and Apecoin holders. It targets a market where Bored Ape series holders do not have sufficient $APE to maximize their yields. Successful in gaining traction with a niche market, ParaSpace has rapidly attracted liquidity, becoming the second-largest NFT lending protocol with $290M TVL within half a year without token bootstrapping.
If ParaSpace can develop a tokenomics system that ties up the entire ecosystem, it has the potential to overtake BendDAO’s place in the NFT market.
About TKX Capital
Note: TKX Capital do not offer any financial advice for retail investors and we have no affiliation with projects in this research.