Lender Use Cases and Potential Strategies
Original post (January 31, 2022); Edited (to reflect some minor updates) on May 19, 2022 as part of transition to Gitbook
If you are new to flowty, please take a moment to review our step-by-step guide and overview of the platform — Flowty Primer. It is important to us that all of our users are comfortable and familiar with flowty’s functionality before taking any actions on the platform.
While the flowty team will never comment on specific loan listings or make recommendations on individual loans, the goal of this post is to share a few different ways that Lenders could potentially approach the flowty market.
In a different post titled How to Value and Price Loan Listings on Flowty we discuss some of the ways that Borrowers might approach setting terms for Marketplace listings. We recommend reading the post before continuing here to ensure you have full context and are best positioned to succeed. In this post, we cover various factors and strategies that Lenders may find useful to consider when evaluating loan listings in the flowty Marketplace.
Why fund a flowty loan?
Before visiting the flowty Marketplace, please ensure that you are comfortable with the mechanics of the platform. It may be beneficial to start with a smaller scale loan as a way to familiarize yourself with the lending process.
Lending via flowty’s Marketplace may be an attractive proposition for ecosystem participants for many reasons, some of which we have covered here:
1. Different Risk-Reward Profile from Buying NFTs
In traditional markets, there are many different ways for investors to gain exposure to assets. You can invest in municipal bonds, investment grade bonds, riskier lending products, funds, assets themselves, options, and more, each with a different risk-reward profile to suit the needs of different types of investors with different goals.
As an investor in the NFT space today, there are limited options. The most prevalent and widespread form of investing is simply acquiring NFTs themselves. Not all investors have an appetite for the risk-reward profile that outright owning NFTs offers. Flowty offers an alternative path for investors who may want a different type of exposure to NFTs.
2. Potential for Passive Income
While some NFTs offer owners an opportunity to generate passive income, many do not. As such, unless you are willing to sell or trade your assets, your capital will be tied up. If you prefer a structure that offers an opportunity for passive income, flowty may be a compelling platform to explore.
3. Leverage Knowledge of NFTs to Identify Potentially Attractive Listings
Many ecosystem participants are highly knowledgeable about the general NFT space or specific NFT collections. Flowty offers these participants an opportunity to leverage their expertise to gain an edge in a different marketplace setting.
It might be worth exploring the flowty Marketplace to see if there are listings with collateral from familiar collections that you believe offer an outsized return for the underlying risk. Flowty may be a particularly attractive alternative if the NFTs that you know well have already increased in price and no longer offer a compelling risk-reward opportunity, but you would still be interested in increasing your exposure to the collection.
4. “Loan to Own”
“Loan to own’’ is a strategy that exists in traditional financial markets. An over-simplified version of the strategy is as follows. Lenders issue a loan to a company that is on the brink of bankruptcy. The loan is structured such that if the underlying company does end up filing bankruptcy, the lender takes control of the business. If the company survives, the lender receives repayment of principal and interest and moves on. In short, the Lender issues a loan with at least a partial intent of ultimately owning the underlying asset.
While a flowty loan differs in many ways from traditional corporate loans, Lenders can use a similar mindset to identify a potentially attractive listing in the flowty Marketplace. If Lenders have a specific NFT they are interested in purchasing, they may prefer to fund a listing in which the target NFT is the collateral (assuming the Lender is comfortable with the overall terms). Should the Borrower default, the Lender has secured a target NFT at what may be (Lenders should always be careful to verify market values and collection volatility before funding a loan listing) a discount to prevailing market prices. If the Borrower repays, the Lender has generated a return on the loan.
The Lender’s risk is that the collateral value falls below the loan value during the loan term. Assuming the collateral value sustains (or falls by a minimal amount) and the Lender’s analysis of the loan terms was accurate, the Lender has created a “win-win” in which he or she either earns interest income or acquires a target NFT below market value.
5. Diversify Portfolio
Flowty offers ecosystem participants the ability to create a diversified portfolio with exposure to different NFT collections and investments with different risk profiles. Given the uncertainty and volatility inherent in the NFT market, collectors may benefit from spreading capital and risk across many types of NFTs and investments.
Funding a loan listing on flowty is an investment that will likely have a different outcome from the performance of the underlying collateral across the loan term. A Lender can be successful despite the collateral falling in value during the loan term. On the other hand, if the underlying collateral increases in value during a loan term, a Lender will not participate in the gains. Under flowty’s current structure, Lenders have capped upside.
6. Opportunistic Lending
The NFT market is unpredictable and volatile. Collections often see significant increases or decreases in value over short periods of time. This dynamic could create a compelling opportunity for Lenders. Loan listings are not automatically updated to reflect changes in the markets for underlying collateral.
It is the Borrower’s responsibility to delist and relist with revised terms. If a Borrower does not revise terms, however, Lenders may be able to identify listings that have a wider margin of safety following the collateral’s appreciation in value. A lender can lower risk without foregoing any return.
Please note that a sharp increase in value may precede a sharp decrease. Sudden and unexpected increases in NFT values may not be sustainable.
Things to Keep in Mind
- Longer duration loans are much riskier for Lenders.
- Flowty loans are “one-sided” in that Lenders do not benefit when collateral goes up in value, but they are subject to capital loss if collateral falls in value. Especially in volatile markets, long-dated, one-sided transactions are much riskier than short-dated alternatives. Please keep this in mind when evaluating listings on flowty.
- If a Borrower defaults and you receive underlying collateral instead of a repayment, it may be difficult and time-consuming to sell.
- Importantly, Lenders should not assume that collateral received is guaranteed to be worth a certain amount. NFT markets can be illiquid and highly volatile.
Flowty offers Lenders an opportunity to participate in the fast-paced NFT space in alternative ways. Lenders can utilize different strategies with varying risk levels to diversify and potentially achieve more attractive or more stable overall returns.
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