DeFi borrower uses luxury watch-backed NFT as collateral for a loan

While some praised the move, others believe that it’s centralized and is adding NFTs where it’s not necessary.

A nonfungible token (NFT) collector shared the story of how a decentralized finance (DeFi) loan was collateralized through a luxury watch and was facilitated with an NFT representing the asset. 

On July 11, pseudonymous DeFi project advisor CirrusNFT explained how a user was able to borrow $35,000 from another user by using an NFT that represented a physical item as collateral for the loan.

According to the exec, a user sent a Patek Phillipe luxury watch to 4K Protocol, an escrow firm that deals with NFTs backed by physical items. The company then sent back an NFT that represents ownership of the watch.

The NFT was then listed on the DeFi lending protocol Arcade. After listing the item, lenders pitched their offers to the borrower. The user then accepted the best loan offer they could find. Following this, the NFT was sent to an escrow wallet, where it would stay until the loan is paid in full or if the borrower defaulted. If the borrower fails to pay the loan, the NFT will be awarded to the lender. It can then be burned to claim the watch. 

CirrusNFT explained that through this process, users can lend and borrow with complete anonymity. Lenders and borrowers do not need to submit their names to each other to go through the process. In addition, the executive believes that this allows people to have access to more global liquidity, which may offer more competitive rates.

Related: Blue chip collaterals help stabilize NFT lending: Paraspace

A community member expressed positive sentiments about the Web3 lending process, tweeting that the story piqued the interest of their dad, who called it “interesting.”

While some welcomed the new way of lending and borrowing, others believe that it’s very centralized and is adding NFTs where it’s not necessary. 

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