Understanding the dynamics of NFT rental is essential to maximize the opportunities and minimize the risks involved. Here, we break down the major differences between collateralized rental and collateral-free rental in the Oort Digital ecosystem.
In collateralized rental, borrowers acquire full ownership of the original NFT, which gets transferred to their wallet during the rental period. Given the nature of this model, borrowers are required to provide collateral that matches or exceeds the value of the NFT.
This system ensures the timely return of the rented NFTs within the agreed duration. However, collateralized rental bears a certain level of counter-party risk, i.e., the risk of borrowers failing to return the NFTs in time.
On the other hand, zero-collateral rental operates differently. Rather than owning the original NFT, borrowers receive a time-locked Wrapped NFT (wNFT). Once the rental period expires, the original NFT is automatically unlocked from the wNFT and returned to the lender. This mechanism eliminates the need for collateral and ensures 100% safety for lenders, mitigating the risk of NFTs not being returned.
The zero-collateral model also provides lenders the flexibility to specify the use cases for which borrowers can rent the NFTs. This allows pricing to be adjusted based on the specific use case, rather than the NFT's full ownership and use.
To facilitate zero-collateral rental, NFT collection issuers are required to integrate with our Software Development Kit (SDK). If the integration is not established, the NFT collection can only support the collateralized rental model.
In the case of collateralized rentals, your collateral is indeed secure. It's held safely in an escrow by our smart contract throughout the entire rental period. You would only risk losing your collateral if you do not return the NFT within the maximum lending duration, at which point the lender has the right to initiate foreclosure and claim your collateral.
For the zero-collateral rental model, however, you're not required to deposit any collateral. Thus, there's no risk of losing any collateral at all. This method offers peace of mind while you enjoy the benefits of accessing NFTs without tying up your assets in collateral.
The security of your NFT can vary depending on whether you're utilizing collateralized or zero-collateral rental.
In a collateralized rental situation, your NFT is transferred to the borrower's wallet once it's rented out. This means the borrower has the option not to return it. To mitigate this risk, we strongly advise setting a sufficiently high collateral amount. If the collateral is equal to or higher than the market value of your NFT, it dissuades borrowers from keeping your NFT with the intention to sell it at a higher price in the marketplace.
On the other hand, under the zero-collateral rental, your NFT remains 100% secure. The original NFT doesn't go to the borrower's wallet, instead, they receive a time-locked, wrapped version of the NFT (wNFT). When the rental term ends, the original NFT automatically unlocks from the wNFT and returns back to you. Hence, this rental model completely eliminates the counter-party risk of non-return.
When utilizing our application, please be mindful of the following risks:
Avoid setting a collateral amount that's too low relative to the value of the NFT. A borrower may decide not to return the NFT and instead sell it at a higher price on marketplaces.
Avoid setting the rental price too high. Remember, the borrower must pay the entire rental price for the maximum lending duration upfront. If the price is too steep, the borrower may decline your offer. Regardless of the price you set or the duration of the rental, you'll be earning interest per second.
Only set long-term maximum lending durations if you're confident that your NFT will retain its value throughout the rental period. New projects may seem liquid and valuable initially, but could lose their appeal over time, like within 90 days.
Be careful about the hourly rental price you agree to. Not all offers are good, and there might be better options available. One advantage of our rental platform is that you, as the borrower, always have the option to terminate the rental within the maximum lending duration.