New ways to monetize with NFTs
065 – Non-Fungible Tokens (NFTs) are digital assets that are traded through blockchain technology and in principle in order to own any of the NFTs you had to buy them directly from the creator or in the secondary market.
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However, it is also possible to own some NFTs, but through loans or the rental of such assets, in other words, the owner of the NFT can “rent” the ownership of the asset for a certain period of time and generate passive income in this way.
How is the renting of NFTs handled? The rent clause of an NFT is made through a smart contract using blockchain technology and it stipulates the time for which the NFT will have a new “owner” and the amount to be paid according to the time.
This feature was born as a result of the large costs that some NFTs have had over time, in addition to the fact that some of them often offer benefits outside the crypto world in order to establish additional incentives for investors.
NFT rental rates
The rental of NFTs is a relatively new and not very conventional practice, since there are few platforms that offer this service and the conditions vary according to the parties involved, i.e., the owner and the person interested in renting the NFT; in principle there are two main ways to rent an NFT.
First, there is income through collateral, which is very similar to a bank loan or mortgage, since a loan is obtained, but in exchange for an initial payment and a guarantee, which is used in case of default by the borrower.
In these cases, the owner of the NFT leases the asset and the counterparty agrees to the terms and conditions stipulated in the smart contract, once both parties reach an agreement the contract is activated and the borrower will have the benefits of owning the NFT for a limited period of time. At the end of the period the borrower has his collateral back, while the lender will already have in his hands a return for renting the digital asset.
Similarly, the loan through collateral can be used in reverse, that is, the owner can request a loan through the cryptocurrency market and placing its NFT as collateral to access the loan, in case of default the NFT would become the name of the counterparty. This process is very similar to that of pawning objects, since a loan is obtained under certain conditions and an asset with a higher value than the loan is given as collateral.
Secondly, there are rentals, but without collateral, this method is very similar to the previous one, but it is more similar to a bank loan, since in this case a commission is stipulated to be paid for the rental of the NFT and the time for which it will be rented.
It is a simpler process and is also supported by smart contracts, which take care of all the operational part of the operation so that the flow of the operation goes as planned.
It should be noted that both practices have been underutilized, and the main “problem” is the value of NFTs, as many of them have experienced both price drops and price increases in a matter of weeks in an exorbitant manner.
Based on this, the following questions arise: What happens if the NFT is placed as collateral to receive a loan and the price varies? This could generate an interest for one of the parties, since if the price of the asset rises, it generates an interest for the lender to make use of the collateral; the opposite happens when the price of the asset falls, since the lender will have received a sum of money higher than the value of the NFT.
Continuing with the example, let’s assume that the second methodology is used and a payment equivalent to a fixed percentage of the value of the NFT for that moment is agreed upon, if the value of the asset varies it could unbalance the balance and it would not be a fair payment for the parties involved. On the other hand, if a payment is stipulated under a fixed percentage based on the value of the NFT at the time of payment, it could generate dissatisfaction for the borrower.
Of course, the smart contract stipulates all the terms and conditions to avoid “legal” loopholes that may later generate doubts about the methodology used for the rental of the NFT; but as in any transaction, there is always an implicit risk that is assumed at the time of assuming these practices, since based on the disputes that have occurred between the SEC and various exchanges, many investors have stayed away from practices that pose a risk to their investment.
Despite being a relatively new and little used practice today, it stands out as a good alternative for NFT holders to generate an alternative return by assigning for a limited time the ownership rights of the digital asset; in addition to generating greater inclusion to other investors who wish to obtain such benefits but without having to pay millions of dollars.