The booming NFT Rental Landscape in 2022
The NFT industry has seen major growth in the past couple of years. NFT projects like BAYC and Cryptopunks have taken the internet by storm, lapping up billions of dollars in market capitalization. However, it is still not wrong to say that NFTs are still in their nascent stages, compared to crypto, and there’s a large amount of potential waiting to be unlocked.
Although there are millions of NFT holders, a majority of the holders end up leaving their NFTs idle in crypto wallets, either out of choice, ignorance or illiquidity. These tend to form what is known as dead investment or idle funds, which from a monetary perspective is less than ideal.
At the same time, the NFT owners are not willing to let go of their digital assets, in the hopes of future value appreciation or utility. This is where NFT renting comes into play. By opening up a secondary economy within the NFT space, renting allows unused NFTs lying in wallets to be utilized in the short term for benefits for the renter.
What is NFT Renting?
Most NFTs that have utility tend to be very expensive, and out of the reach of the masses. However, such NFTs may be required to gain access to, or unlock certain features in say the Metaverse or some game/dApp.
NFT renting allows individuals who don’t own a particular NFT to acquire it for a short time period by ‘borrowing’ it from the ones who hold the NFT and wish to ‘lend’ it out, for a mutually agreed price.
NFT rentals can be done P2P, but this could be risky if any of the party defaults. This is where presently available escrow based NFT rental provisioning projects like reNFT and IQ protocol come into the picture.
Why rent NFTs
There is not one, but many reasons why NFT renting can be an exciting proposition. This can range from in-app upgrades and early access to status and exclusivity.
People may not always own certain NFTs that unlock in-game benefits such as level ups or additional character virtues. Purchasing these just for playing the game can quickly become expensive. By renting an NFT, they can use it for their specific purpose and then return it back, thus achieving their goals at a fraction of the cost.
Early or Exclusive Access
Owning certain NFTs gives you access to exclusive events, activities or content. For example, certain Metaverse events need NFTs to enter and participate in. Owning these NFTs may either be too expensive or it isn’t worth having just for the event. This is where choosing to borrow an NFT through renting makes sense. In case the owner of the NFT has bought the NFT for other utilities without being interested in attending the event, they can rent it out and thus get passive income from it.
Land on the Metaverse has become the most sought after virtual commodity, owing to the increasing interest in real world brands trying to mirror their physical experience on the Metaverse. As a result, metaverse land rates are becoming expensive, and renting out the lands is quickly becoming more mainstream.
Based on the seasonality of events and occurrences, people like to flex and flaunt their NFTs related to these events. Purchasing many of these NFTs can be expensive, and thus renting them makes more sense.
Pros and Cons of NFT Renting Services
As this is a newly developing market, while there is a lot of potential, there isn’t too much competition in the space. In terms of lending fiat against NFTs, there are plenty of players in the market including biggies like NFTfi, but NFT renting currently has only two major players — IQ Protocol and reNFT.
reNFT utilizes its escrow service to allow lending and renting of NFTs on a temporary basis. They allow both collateral based and partner-assisted, collateral-free NFT renting.
On the other hand, IQ Protocol describes itself as a DeFi framework for wrapping expirable versions of digital assets, thus facilitating digital asset renting. As such, IQ Protocol is purely a collateral-free (uncollateralized) renting platform.
While renting seems to be a one-stop solution to all the problems plaguing NFTs, it is most certainly not a magical wand, and thus has its fair share of cons as well.
Collateralized vs Uncollateralized Renting
Collateralized Renting would mean renting out the NFT with a collateral in place, to be deposited by the borrower to ensure the safety of the lender. All these processes take place through smart contracts that automatically lock and release collateral as well as NFTs as per the time duration of the rental.
The benefit of such a renting process is that the receiver gets the actual NFT, whereas it can become a negative proposition in case the value of the NFT exceeds the collateral, thus incentivizing the borrower of the NFT to default on the renting and rather sell.
Uncollateralized NFT renting takes place in a slightly different (and simplified) manner where lenders do not need to part with the original NFT, and thus borrowers do not need to pledge collateral, thus minimizing financial implications and becoming more inclusive towards people who may not necessarily have liquid funds to serve as collateral.
Borrowing NFT without collateral can be done in a marketplace that supports uncollateralized renting. The NFT is deposited into a smart contract, where a wrapped NFT is minted which features all the same characteristics and attributes of the original NFT, and this is backed by the asset. On returning the NFT, the wrapped NFT is burned, thus unlocking the original NFT for reuse.
However, the biggest drawback here in current uncollateralized NFT rentals is that technical integration for the rented NFT would be required at the project’s end, as most platforms cannot recognize wrapped or expirable versions of NFTs created by these NFT rental services. Thus, uncollateralized NFT rentals in their present form become unsuitable for wide deployment and to serve the purpose of NFT use cases.
What would however prove to be a breakthrough is the rental provisioning of real/actual NFTs in an uncollateralized manner, without the lender being worried about defaults from the NFT borrower.
Do you have any NFTs lying unused in your wallets? If yes, have you decided to rent it out yet? Let us know in the comments.