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Web3 lending platform Arcade has introduced a unique feature that allows peer-to-peer loans to use luxury watches as collateral. The protocol utilizes NFTs to guarantee the terms of these loans.
A decentralized finance (DeFi) protocol specializing in NFT lending, Arcade has recently facilitated its users to lend three Rolex watches to anonymous borrowers in exchange for cash. Product options include a Daytona for $20,000 at a 15 percent annual percentage rate (APR), a GMT-Master II for $14,500 at a 12 percent APR and an Explorer for $20,000 at a 12 percent APR.
The owner of the Daytona and Explorer also lent a Patek Philippe watch for $35,000 at 12 percent APR. The loan durations range from 56 to 90 days.
Pseudonymous DeFi project adviser CirrusNFT shed light on how the lending works. The borrower sent a Patek Philippe watch to 4K Protocol, an escrow firm specializing in NFTs backed by physical items. In return, the borrower receives an NFT representing ownership of the watch.
The borrower then lists the NFT on Arcade, where lenders present their loan offers. The borrower chooses the best offer, and the NFT is transferred to an escrow wallet. It will remain there until the loan is fully repaid or the borrower defaults.
If the borrower defaults on the loan, the lender will receive the NFT. They can claim the watch by burning the NFT. Per the Arcade website, borrowers also have the option to prolong an active loan by proposing an extension offer. They can agree to a new term whenever they prefer.
Meanwhile, once the borrower has fully repaid the loan, the watch will be returned to them. According to 4K founder Richard Li, users must burn the corresponding NFT and provide a shipping address to receive the collateral. They may also need to provide additional identification for shipping insurance purposes. However, if the borrower is unreachable, the watch will be transferred to the lender.
One significant advantage of this process is the anonymity it provides to both lenders and borrowers. They can engage in the lending process without giving names or personal information.
“Borrowers can tap into global liquidity on permissionless peer-to-peer infrastructure, likely at much better rates than a pawn shop,” said Gabe Frank, founder and CEO of Arcade.
While NFT lending has primarily revolved around high-value digital assets like CryptoPunks and Bored Ape Yacht Club profile pictures, borrowing against physical luxury goods represents a novel development.
According to Blockchain ecosystem analytics Dune, Arcade has processed approximately $100 million worth of NFT-based loans so far. Blend, the leading platform in this space, has achieved over $1.3 billion in NFT loans in just over two months by offering attractive trading incentives.
Arcade does not only offer loans backed by luxury watches. It has also explored lending programs backed by debt positions, tokenized real estate and apparel. Although the concept of using physical goods on the blockchain is still in its early stages, Frank believes that the growth potential is significant.
According to OpenSea, over 30 watches have already been represented as Ethereum NFTs by the 4K Protocol. Some people view this Web3 lending process as intriguing. However, others argue that it centralizes lending and unnecessarily incorporates NFTs into the equation.
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