Use Cases for Borrowers
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.
The goal of this post is to provide an overview of several common use cases for Borrowers on flowty
Why would I use flowty instead of just selling my NFT?
Asset owners borrowing against their assets is a common and powerful practice used by countless individuals around the world. Many people have mortgages on their homes, use margin loans to borrow against stock holdings, borrow against life insurance policies, and take out loans using art or collectibles as collateral. Doing so allows individuals to retain ownership of their assets while ensuring sufficient liquidity to manage everyday life and pursue other investment opportunities. Borrowing capital also encompasses significant risks, so please ensure you understand the dynamics of borrowing and interest before using the platform.
Many collectors are sitting on significant NFT portfolios, but are unable to unlock the value of their NFTs without selling. As NFT collectors ourselves, we are familiar with and understand the dynamics of the NFT market. The market is nuanced and complicated and has periods of illiquidity. Such complexities mean that there are times during which selling would not be optimal or preferred.
There are certainly situations (quick flips, shifting sentiment about the future value of a collection, etc) in which collectors would be best served by selling an NFT. There are, however, many other situations, in which a collector may need or want access to short-term liquidity but selling may be suboptimal, tax inefficient, or, simply, not the ideal choice for a collector. Flowty offers an alternative solution to these collectors who would prefer not to sell.
Use Cases for Borrowers
We have highlighted several scenarios in which it may be advantageous to secure a loan using an NFT as collateral instead of selling:
1. Market Illiquidity
The NFT space is in its infancy and moves incredibly fast. One of the consequences of being so early to the space is that many NFT markets experience periods of illiquidity. The bid (the highest price a buyer is willing to pay) and the ask (the lowest price a seller is willing to accept) may have a wider spread in NFT markets than in other markets because of how few participants there are in the space and the relatively few transaction data points that collectors have available to them.
As such, there are times when an asset owner does not feel as if he would be able to sell at what he deems to be a reasonable price because collectors are focused on another project launch or buyers have capital tied up elsewhere. In these cases, a collector may be forced to sell below his or her perceived market value of an NFT in an effort to unlock liquidity.
Flowty offers collectors greater flexibility with regard to timing sales. Instead of selling an NFT at a discounted valuation, you can borrow against the NFT (or another NFT in your collection) to access liquidity until you are ready to sell.
2. Expectation of Future Price Appreciation
This section is similar in nature to the prior section (on illiquidity) in that it touches on a collector’s desire to avoid selling under today’s market conditions. In this case, however, a collector’s desire to retain ownership of an NFT is driven by his or her belief that the market is well-positioned to increase in value in the near future based on an important upcoming announcement, strong momentum, increased exposure, or any number of other reasons.
Collectors are intimately familiar with their NFTs’ market dynamics and may have much greater insight into the future value of their assets than the general market. As such, they may want to keep ownership of an NFT instead of selling prematurely, even if they need short-term liquidity. This would be an ideal use case for flowty.
3. Utility / Desire to Retain Membership of a Community
There are many NFT collections that are more than just art or a simple collectible. They are membership cards, tickets to events or experiences (IRL or virtual), raffle tickets, merchandise redemption cards, access to celebrities / athletes / artists, or more. Collectors who need liquidity may find themselves in a difficult position if they need to sell an NFT that offers future utility and access to a community. Utilizing flowty to assist with short-term liquidity while retaining ownership of your NFT allows you to have the best of both worlds.
Please note that during the life of a loan, collateral is held in a smart contract (think of this as a trustless escrow for our purposes) rather than in the Borrower’s or Lender’s wallet. As soon as a Borrower pays back the principal + interest of an active loan, the collateral will automatically be transferred back into his or her account.
4. Sentimental Value
Many collectors have NFTs with varying levels of importance or significance to them, with some holding sentimental or collectible value well above their market value. Whether the NFT completes a set or collection, has a special serial number (birthday, anniversary, area code, cultural significance, etc), is a 1/1, or was a gift from a friend or family member, some NFTs cannot be replaced. For some collectors, NFTs that carry sentimental value may also be among their most valuable assets.
So, how does one benefit from and unlock the value of one of these NFTs without selling the asset? Borrow against the NFT (carefully and with a margin of safety and a clear plan for repayment) on flowty.
5. Hedging Your Portfolio
If a collector has a significant portion of his or her net worth in one NFT collection, it may be prudent to consider taking out a flowty loan against one (or more) of the NFTs from the collection. Depending on the structure of the loan, you may be able to protect your downside in the event of a market crash. If the value of a collateralized NFT falls below the loan value, a Borrower is fully entitled to default on the loan and allow the Lender to collect the underlying collateral instead of paying back the principal and interest.
In other words, the loan allows you to set a floor on the value of the NFT regardless of what happens to the market while the loan is outstanding. This is a somewhat complex concept and one that we would be happy to discuss with any Borrowers who would be interested in learning more. Please feel free to reach out to us via Twitter or Discord with any questions.
6. Defer Capital Gains Taxes (Please Consult with a Qualified Tax Expert)
We want to reiterate that we are not tax attorneys, and you should consult with a tax professional before making any decisions around taxes. In addition, please keep in mind that tax rules vary across the world and that there is uncertainty around the tax treatment of NFTs at the time of writing.
In many countries, selling your NFTs is a taxable event. While it varies by geography, you may owe significant taxes on any gain from an NFT sale. A well-documented strategy among investors in traditional asset classes is to borrow against assets (especially appreciated assets) instead of selling. This strategy allows you to minimize capital gains, while benefitting from the underlying asset’s appreciation to ensure you have sufficient liquidity to make other investments and fund your day-to-day expenses.
7. Complete NBA Top Shot Challenges Without New Capital
Many NBA Top Shot collectors have encountered a situation in which they have five or six of seven moments required for an NBA Top Shot Challenge. The user may not have or want to invest the requisite capital to acquire the missing components.
One strategy that collectors can consider is to use an idle asset to take out a short-term loan and use the loan to proceeds to complete the challenge. Even though the collector will be paying interest for the loan (likely minimal interest with a shorter term loan), the value of the challenge reward may exceed the cost of taking out the loan. As such, a collector can sell the challenge reward or another asset to repay the loan and collect the difference between the reward value and the cost of the loan.
Flowty is a flexible, innovative tool that can offer NFT owners access to liquidity to address a broad range of circumstances and life situations. Whether you need to fund upcoming expenses, defer capital gains, time a volatile market, or raise funds for other investments, flowty may be the right solution for you.
Please use extreme caution when taking out a flowty loan. If you are unable to repay the loan + interest in full by the agreed-upon date, you will forfeit your NFT.
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