DeFi users are anonymous, so lending has typically been overcollateralized. This is capital inefficient. The more I know about you, the easier it is to decide how safe it is to decrease the collateral requirement. So without a full credit reporting agency in DeFi, how do you fix that?
Money markets (like Compound and Aave) first popularized overcollateralization and allowed users to unlock liquidity in the ERC-20 assets they held. With the emergence and growth in value of NFTs, holders have been searching for new solutions to allow the same liquidity unlock. However two major problems exist: how does a lender effectively value Non-Fungible Assets, and how do they make sure the specific NFT being used as collateral can be sold to cover debts and prevent defaults? Enter UnUniFi.
Solving the Valuation and Liquidity Problem
Many recent projects attempt to assign a value to NFTs. Some use community appraisals (with incentives to properly assess), others compare rarities and current marketplace bids, and some combine this data with AI to predict prices at liquidation. Each has benefits and concerns, but none of these models is perfect.
UnUniFi introduces a new model where borrowers can solicit bids on their NFT to establish a fair value. A potential borrower lists the asset on UnUniFi’s marketplace and selects which assets can be used for bidding. After the bidding process (which requires potential bidders to lock capital and be willing to acquire the asset at that price), the NFT owner can then borrow a percentage of the assets pledged in a bid (depending on LTV parameters). (In v1, these will be fixed term loans, but this may change in future versions.) In the case of default, the NFT simply transfers to the lender (who gets it for their bid price), solving concerns around liquidation.
The Financialization of NFT Markets
Since our early investment in NFT infrastructure leading OpenSea’s seed round in 2019, we have been interested in backing the financialization of NFT markets. Recently, we backed Cyan, a Buy-Now-Pay-Later product that has the same financial mechanics for vault LPs as selling put options on assets, and reNFT, which enables uncollateralized NFT rentals through escrow contracts and eventually unique financial contracts (e.g. lease-to-own). UnUniFi’s model also mimics the outcomes of financial products, in this case options in v1. For example, borrowers have the right (but not obligation) to relinquish ownership of their NFT for the bid price during or at the end of the loan. Each of the financial aspects discussed can be built on top of to create new products and services around NFTs (or shift financial/risk elements elsewhere), and we are just seeing the beginnings of what will be built in a composable world.
UnUniFi solves the core problems around valuation and liquidation that exist when using NFTs as collateral for loans, which will create a more efficient lending market for this asset class. Not only does the model allow for more accurate valuations backed by bids, it also ensures lenders can provide capital with no liquidation or principal risk (other than relinquishing their principal in exchange for receiving the NFT at their bid price). This is a fundamentally better model and the market will converge to this solution when it realizes the efficiency of this new mechanism.