Building New NFT Standards to Enable Better Renting and Collateralization Experiences
Existing NFT standards are inadequate; they only support operations such as buying or selling. Renting or posting an NFT as collateral while retaining use are feasible with significant get-arounds that impose a high cost on all parties limiting their practical use.
Take the case of renting. Currently, ownership of the NFT is often transferred to the renter. This means the owner risks losing control of the asset. To discourage this, renters are often required to post collateral which is about 150% of the NFT’s value. The additional risk owners bear combined with the high collateral requirements placed on renters make renting unviable.
Borrowing using NFTs as collateral is also a sub-optimal experience. When owners borrow against their NFTs, they relinquish ownership to an escrow account. This means they can’t use it until they pay back their debt fully.
One way to address these problems would be for a new open-source protocol that takes custody of NFTs and in exchange issues proxy NFT representations. These proxy representations should contain metadata such as the original owner’s identity and additional contractual information such as duration of validity and whether it can be resold.
So how would this work in the case of renting? Suppose, Alice has a club membership NFT and she’d like to rent it out to Bob for 3 days. Alice would transfer her NFT to this new protocol. This protocol would issue Alice an NFT to indicate she is the owner; it’ll also issue Bob an NFT to indicate that he is the renter of this NFT for the next 3 days. At the end of the period, Alice can obtain back her original NFT and Bob’s rental NFT becomes void. With this new setup, there’s no risk of Alice losing ownership of her NFT or Bob doesn’t have to post high amounts of collateral.
This new protocol can also improve NFT-backed loans experience. Suppose, Alice has an NFT she’d like to borrow against for 3 months and Bob is the lender. She’d then pass her NFT to a vault. The vault will in turn transfer her NFT to this new protocol and pass her a proxy NFT for three months. This way, Alice’s NFT usage experience is not impaired just because she’s borrowing against it. If Alice pays back on time, the vault which is the current owner will obtain back the original NFT from the protocol and return it back to her. In the case she defaults, the vault will obtain the NFT back from this new protocol and transfer ownership to Bob
There are some edge cases that need to be thought through. Can the original owner revoke the proxy NFT before the stipulated time? What happens if the original owner who rented out the NFT wants to sell the NFT? Do prior rental agreements have to be honored after a new owner takes over? How can we support operations like time-sharing where multiple renters have overlapping ownership claims?
One way to think of this new open-source protocol is that it is similar to cross-chain bridges that wrap assets. The distinction here is that the asset is being wrapped inside the chain and a synthetic time-bound asset is passed.
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Girri M Palaniyapan is the founder of NFTHailer.com which is an NFT rating and review platform.
Published By : NFT Hailer