---
title: 4.2 NFT Lending, Fractionalization and Time-Scarcity
description: What can we do with non-fungible or intangible assets?
---

# 4.2 NFT Lending, Fractionalization and Time-Scarcity

In this lecture, the focus is really on zooming into three of the most clearly established use-cases of non-fungible tokens, which also have significant room to grow into the future. While last lecture focused a large amount on the foundations of NFTs as well as the _what_ and _how_ behind them and their many different forms - this lecture asks the question _so what?_ What can we do with this non-fungible or intangible asset class that is suspected of being valued at around $77 trillion dollars? And what are the implications of this _so what_ on how we might expect our world to change in the future? 

From a high level we are going to be zooming in on the lending of NFTs, the fractionalization of NFTs, and the notion of ‘time-scarce’ NFTs. Each use-case explains a fundamental direction of this technology's development into the future - and most importantly - each use-case is relevant for any growing NFT ecosystem on an L1 blockchain. 

## NFT Lending

The concept of NFT lending can be broken down into a number of sub-areas: 


* **Peer to Peer NFT Lending**: This refers to ‘orderbook’ style lending of an NFT, from which one user can loan out their NFT to another user, in exchange for a loan of value. This requires a potential lendee to find a matching lender in order to be successful. If the lendee cannot repay the loan by the date it is supposed to, then the NFT that was loaned as collateral is offered to the lender at large discount. NFTfi is the best example of this type of product that currently exists. 

_“NFTfi, one of the larger services, had its public beta launch in June 2020. It did $300,000 in loans in its first year, $14 million in 2021 and $150 million so far in 2022, with $37 million in loans [outstanding](https://dune.com/rchen8/NFTfi). Its loans range from 30 to 180 days in duration. The loans are paid back all at once, like a traditional bullet loan.” ([Protocol](https://www.protocol.com/fintech/nft-lending-crypto#toggle-gdpr))_



![](@site/static/img/bootcamp/mod-em-4.2.1.png)

* **Peer to Protocol NFT Lending:** Peer to protocol lending operates similar to a decentralized exchange - communally pooled liquidity is utilized from which owners of NFT’s are eligible to lend out their NFT to the protocol itself at a specific rate. BendDAO is most prominent of these protocols, with a number of ‘bluechip’ NFTs collateralized. With such protocols it is up to the design of the protocol to decide at what point an NFT is liquidated due to a drop in value. 
* **Non-Fungible Debt Positions:** These are just another way of saying, lending to a protocol for stable value, backed by a US Dollar. In simple terms, the NFT can be used to get a certain rate of USD. The assumption is that the NFT is whitelisted by the platform, and has established some threshold of value. 
* **Renting and Leasing NFTs:** Unlike collateralization and liquidation, renting and leasing on places like reNFT, establishes ‘tenancy’ from which a smart contract is used to manage the transfer of the NFT from one wallet into the other, until the tenancy is over. Such a rental market is fascinating insofar as it creates a further avenue of use for NFT’s beyond having to own each one. For example, I could leverage one specifically for an upcoming event that I need to access, or use it to showcase a certain profile as a social media growth strategy. 
* **Centralized Lending on NFTs:** Genesis trading (prior to its insolvency) as well as Nexo, were both centralized custodians that allowed users to take out direct loans for collateralizing their NFTs. 
* **[Hypothetical] Loaning out non-fungible value for another type of non-fungible value.** While this specific service does not exist yet, the premise is that a community, DAO, or platform could allow certain NFT’s to be locked and loaned out in turn for other NFTs. 

_Idea - An all in 1 product offering all 5 NFT lending services._

_Requirement - Price discovery and sufficient Oracle Infrastructure._

**Presuppositions:** In order for a lending market to develop around NFT’s, there are specific incentives and presuppositions required: 

**Ecosystem Liquidity:** Our ‘tech tree’ understanding of the evolution of the crypto product stack would suggest that sufficient liquidity would be required on the L1 ecosystem as a whole, in order allow for sufficient price discovery within the NFTs themselves, as well as collateral for lending upon them. 

**The incentive to borrow for Users –** Users lock up their NFT, from which they are required to pay interest on the loan, and cannot utilize the NFT while the loan is outstanding. They do however receive direct cash for their NFT, which can be used in the event of a liquidity squeeze or for immediate capital relief. From a high level, users with some form of intangible value, now have the ability to withdraw temporary fungible value, using the non-fungible value as collateral. 

**The Incentive to Lend Capital from Lenders –** From the lenders perspective the theory is straightforward: Earn interest on your capital, with the guarantee that if the owner of the NFT default’s you are able to acquire the NFT at a massive discount. The elephant in the room for lenders, is the need to have fair price discovery on the form of non-fungible value. Which in virtue of being non-fungible, is not often easy to do. 

**There is Established and Clarified Value for the NFT in Question –** Many of these lending platforms only offer loans to ‘whitelisted’ ‘bluechip’ NFT collections. This is another way of saying that the space as a whole is young, and insufficient value or attention has been given so as to create realistic price discovery for stable lending markets. Until there is established and clarified value for the NFT’s in question, there is limited opportunity to lend off of them. 

**Relevant Oracle Infrastructure to Supply Pricing:** The final point - and also one that is a potential vulnerability - is the need for reliable 24/7 Oracle infrastructure to support the management of value, and liquidation thresholds for the NFTs being loaned in question. Without such infrastructure no NFT lending is possible. 

**_The ‘So What’ for Lending NFTs:_**

Bearing in mind the nature and presuppositions for NFT lending, there are a number of ‘so-what’ takeaways from the service that further expand the value proposition inherent to non-fungible tokens: 



* _More financial tools for the average person:_ Today, only certain assets can be collateralized for a loan - usually your house as a last resort. With the lending of NFT’s the playing field is drastically expanded for both individuals and institutions - capital can now be accessed, for things like academic research, music, art, or even an NFT indicating a certain consistent behavior. The macro result is a better way of moving capital between individuals and institutions. 
* _Huge aggregation opportunities for bundling and baskets of non-fungible value:**_ Second, the prospect of being able to aggregate bundles or baskets of non-fungible value, from which loans can then be taken out, further expands the idea of creating accessible value from fractions of other types of value. Instead of requiring the entire NFT for a loan, you can intertwine, the multiple bunches of NFTs. 
* _A re-focus on capacities - return of guilds? Capacities are tradeable now for anything else:_ Expanding the types of value that can be credited, expands the types of activities that can be used to generate value. Businesses and communities can now spring up and thrive off of the re-sale, and lending of their intangible value - should a market sufficiently large enough develop. For artists, this is a huge lifeline in a traditionally impoverished industry. The larger principle at play, is that certain capacities or ‘skills’ are now financially productive. 
* _A new system for generating credit - running parallel to the archaic system:_ Piggy backing off of the latter point, the opportunity to ‘exit’ the old financial system grows with the ability to take out loans off of non-fungible value. 
* _Secondary incentives for participants across the product stack:_ Implicit in this entire discussion is the underlying premise that due to the fact that crypto is composable, there are new incentives for users of any product that may contain an NFT inside of it. Whether that be a metaverse, play2 earn game, liquidity for DeFi projects, or something else, the implication is that there is further value to be unlocked downstream. Example: Play a game, earn a rare item and then make money loaning the item out over time. 

Looking ahead, it’s likely that in the future, non-fungible lending will expand such that more types of non-fungible value are eligible for a loan, with certain loan rates expanding to rival existing mainstream lenders (potentially to even include mortgages). Lending of Non-Fungible value remains in its infancy. 

## Fractionalization

Fractionalizing NFT’s - and creating fractional NFT marketplaces by extension - refers to the capacity to split up an NFT into different pieces, such that each individual piece can be independently owned, yet with the value maintained as a proportion of the composite piece as a whole. There are three primary benefits of NFT fractionalization: 



* **Expanding Access to Ownership of Non-fungible value (fractional Art via Ren DAO).** The first benefit of fractionalization refers to the notion of fractional ownership: That many people can own the same non-fungible asset - in proportions and pieces. This entails benefiting in value accrual of the non-fungible asset (if the price where to go up), benefiting from the access, benefits, or value capture derived from the NFT (for example, if it allowed access to an event, gave out streams of benefits, or yielded value on a recurring basis). From the product’s angle, fractionalization of NFT’s also allows for the placement of fractions into other products - games containing pieces of art for example. Fractional ownership is thus leveraged for incentives within other products and for users. 
* **Expanding Decision Making on the Uses of Non-fungible Value (deciding where to put a piece of art, where to place a movie clip, where to share an article):** As Non-Fungibles develop as an asset class, the creators of the value hold significant decision making power over how future ownership of the non-fungible may determine decision making power over the object. This applies to artists and their art, musicians and their music, communities and their voting on events and locations, and even movie or media producers on who has a right to license the film. Fractionalization of NFT’s means that this decision making power is fractionalized like stock-options can be for fungible assets. It is essentially collective decision making over the fate of an intangible asset. Previously the valuation of the intangible asset would not have been possible at scale - now it is not only possible but possible to be managed by a collective of stakeholders invested in the future of the asset. 
* **Expanding Financial Granularity of non-fungible value (real estate baskets going long and short on certain houses):** This last value proposition is directly on the level of financial products - fractionalization of NFT’s allows for further financialization of intangible value. Baskets of different NFT’s can be created, from which financial positions can be taken (for example, real estate on the lower east side, Harlem and Bronx). The value accrues to the asset as a whole, from which the fraction is a part. Participants however do not need to possess the entire non-fungible asset, in order to benefit from its upside. 

Once more, the success of any fractional NFT marketplace is dependent upon underlying price discovery and value discovery with the original NFT collection or class itself. There cannot be fractional ownership of an asset that is not valued by a larger market. 

## Time-Scarcity with NFTs:

The final category for this lecture is an interesting one, largely because of its non-monetary basis. Time-scarce NFT’s refer to Non-fungible tokens that are rewarded or accessed only after the specific amount of elapsed time has passed. Beyond simply ‘putting the time in’ there is no way to game the system to access the NFT. 

The interesting thing about time-scarce NFT’s is that they invert the characteristic value logic with NFT’s: Usually an NFT is a representation of some form of value - that is to say, it designates the value inherent in something else - for example a piece of art. With time-scarce NFT’s however, we are dealing with the NFT itself, becoming the indicator of value. The value is generated, in the NFT itself, due to the fact that the only way to create the NFT in the first place is from ‘putting the time’ into something. 

From a high level, time-scarce NFT’s are a return to a ‘class system’ of sorts, from which individuals, groups, and collectives, can be identified based upon their skill, stature or involvement in a specific activity. An easy way of thinking about this, is to imagine the black-belt system in martial arts, becoming applicable across the domains of expertise on the internet. Time-scarce NFT’s back this activity, providing successful users capable of obtaining them with status, access, and new opportunities. 

_Some of the Areas Most Open for Use of Time-scarce NFTs Include:_



* **Game Items:** Playing the game or doing a certain activity in the game generates an item designating your skill or mastery, from which you are given special access to areas, weapons, tools, or other players. 
* **Community Membership - Guild Achievement:** Inside of different online communities (or real world communities) the time-scarce NFT designates your rights to earning dividends from the collective group, right to days off, or to designate you with a specific role (such as in the military). 
* **Learning Commitment / Mastery:** For learning, recognition of certain skills, or mastery in a particular area, time-scarce NFT’s have the opportunity to replace diplomas’ and certifications in the mainstream world. The important qualification and difference is that such NFT’s are most likely to be awarded based upon specific on-chain verifiable metrics, such that any user of the future could verify that the holder of the NFT did participate sufficiently to earn it. For learning, mastery designations, and time invested in certain topic areas, time-scarce NFT’s hold a large promise for the future of science, research, and bestowing titles in the world. 
* **Forest Project NFTs:** A real example of time-scarce NFT’s being utilized are those on Open Forest Protocol: Each forest project uploads data from their NFT, from which the validation result is written into the NFT meta data. Notably, they can only receive carbon credits on their second data upload, meaning they must successfully manage their forest for 6 months before becoming eligible. The NFT, which is untradeable, then reflects the status of the forest over time. 

Drilling into fractionalization, lending, and time-scarcity demonstrates to us that non-fungible tokens are an extremely flexible technology. In order to fully carve out these benefits, however, a prospective user or builder must have an original understanding of potential non-fungible use-cases, as well as where the market is at today.