A nonfungible token (NFT) collector recently shared the story of a groundbreaking decentralized finance (DeFi) loan transaction. The loan, worth $35,000, was secured through an NFT representing a physical asset—a luxury watch. The NFT worked as collateral, bringing the real and virtual worlds together.
Loan generates buzz on Twitter
Pseudonymous DeFi project adviser, CirrusNFT, detailed the loan process on July 11. The borrower entrusted a Patek Phillipe luxury watch to 4K Protocol, an escrow entity known for handling physical assets represented by NFTs. In return, 4K Protocol issued an NFT certificate reflecting the ownership of the watch.
Listed on Arcade
The unique NFT was subsequently listed on Arcade, a DeFi lending protocol for NFTs. Lenders then submitted their loan offers to the borrower, competing for the opportunity to lend against this unusual collateral. The borrower accepted the most competitive offer, and the NFT was placed in an escrow wallet.
The watch-backed NFT remains in escrow until the borrower repays the loan in full. In case of a default, the NFT is transferred to the lender, who can burn it to claim the physical watch.
According to CirrusNFT, this system enables borrowers and lenders to transact with complete anonymity. In his view, this might expose users to more global liquidity, potentially providing more competitive rates.
A new frontier of possibilities or just a pawnshop with extra steps?
The unconventional use of NFTs in DeFi lending sparked interest among community members. However, the method has also drawn criticism. Some argue that it introduces a level of centralization and complicates the process by unnecessarily integrating NFTs, calling it a pawnshop aggregator.
Regardless of differing opinions, this case marks a new frontier in the use of NFTs within the DeFi space.