Building Scalable Infrastructure for NFT Lending (Part 1)
Today, Honey Labs is introducing the first part of its 3 step plan to overcome bottlenecks for scalability around NFT liquidity.
I’ve discussed these bottlenecks in a previous article, Why Nobody Cares About NFT x DeFi — TL;DR : P2P allows customised, highly flexible loans, but is less efficient to match supply and demand, making it slower to scale. P2C allows instant matching of supply and demand, but speed comes at the cost of customisation, making the loans overly generic. NFT x DeFi protocols can build hybrid solutions to overcome this scalability dilemma between P2C and P2P.
To reach mass adoption (or at least maximum potential) peer-to-peer protocols need to adopt the user experience of peer-to-contract protocols, and peer-to-contract protocols will need the flexibility of peer-to-peer.
Reminder: Peer-to-Peer (or P2P) refers to borrows matching with lenders in a marketplace. Peer-to-Contract (or P2C) lending refers to lenders depositing liquidity into pools, and borrowers borrowing from said pools.
Once this user experience (UX) problem is dealt with, scalability will still be greatly limited by how much debt illiquid NFT markets can support. But we’ll leave that for part 2 of our series…
Hybrid Solutions
To improve upon the shortcomings of peer-to-contract lending, we’ve created Honey P2P, a layer 2 application on top of our core lending / borrowing protocol.
Just like any layer 2, it can be used in isolation as its own P2P lending protocol. However it also gives P2C NFT borrowers the ability to refinance their loans in a peer-to-peer market.
How does refinancing work ? Holders of rare NFTs, borrowing from P2C pools, will now be able to find P2P lenders who are willing to issue more debt against the collateral, and appraise the collateral above the floor. Whereas a borrower might only be able to borrow 50% of the collateral’s value from a P2C pool, they can choose to refinance it on Honey P2P, and find a lender willing to supply liquidity for 70%, 90% or any % of the collateral’s value.
Not only does this solution allow the protocol to issue more debt and collect more fees, it does so in a way that secures the overall solvency of the loans. How ?
1- P2P loans allow borrowers to obtain higher LTVs and borrow more from their NFTs.
2- P2P loans remove strain from our liquidation markets, and instead sending NFTs to P2P lenders, reducing the risk of bad debt.
The protocol can now host an entirely different category of lenders. While most DeFi lenders simply seek a high yield on their USDC, NFT lenders are equally content with receiving discounted NFTs in exchange for their capital. Combining both categories of lenders creates deeper liquidity on the platform, allowing for more debt and higher solvency.
Permissionless P2P protocol
Honey P2P is permissionless, which means any and all NFTs can be used as collateral.
This opens up the door to more sophisticated use cases, such as insurance or derivative contracts being built on top of NFTs through the platform. To facilitate this and make Honey P2P future proof, the platform focuses on supporting financial NFTs (like options or LPs) and real world assets as well as JPEGs.
After the completion of an audit, the platform’s code will be made public, with an incentive program for builders to develop protocols on top of this permissionless P2P platform.
To avoid scams and fake NFTs, the team will proceed to collection verifications, with appropriate warnings on unverified collections.
Features
Honey P2P is built to:
- Refinance P2C loans
- Obtain higher LTV loans
- Serve as an extra liquidation tool for P2C loans
- Allow collectors to obtain discounted NFTs
- Pay customised interest rates
- Introduce fixed duration loans
- Create customised term sheets for loans
and much more, which we will build alongside our community of open-source developers. Features will be rolled out incrementally, starting with community testing, then beta phases.
Starting today, our community of pollinators can try the team’s devnet demo for testing. If testing finds no errors we will be able to deploy this early version of Honey P2P on mainnet in the following days.
To learn more and start testing Honey P2P, make sure to join our discord and own Honey Genesis Bees by clicking here.
