Since delving into the world of NFT lending, I’ve heard all kinds of perspectives about why it would or wouldn’t work. Considering 259,000 NFT loans for a total of $3B have already been originated over the last 2 years, there is sufficient evidence to suggest that there is at least something to it. But that raises the questions as to who is doing all this borrowing and why?
As one friend put it to me, “are average people really going to use an NFT for a loan to fix their car or to start a business?”
When put like that, it does sound farfetched, especially so when I was pressed about whether or not the borrowers would be prepared to deal with the nuances of paying back an NFT loan in particular. Do they have to pay back in eth? Do they make regular payments? What happens if they miss the due date? etc.
That’s when another person told me that I was thinking about this all wrong, that the borrower isn’t likely to be a person sitting there stressing out about how to pay it back. The borrower won’t even be a person at all.
What?
A reference was made to a past tweet I made, where I said that Wall Street had bullied out retail investors in p2p lending.
During the heyday of peer-to-peer lending, I invested in more than 4,000 fractionalized loans.
What happened? Wall Street bullied out retail investors and took over the market.
Are NFT loans a rebirth of the peer-to-peer lending frontier?
— Seán Murray | sean3.eth (@financeguy74) August 6, 2023
Unbeknownst to me, many of the lenders in NFT p2p lending are already bots and they already have an advantage against anyone trying to manually place bids. But also unbeknownst to me is that many of the borrowers are also bots!
Because crypto has created an infrastructure well-suited for automated trading, people or firms have created bots that seek out arbitrage opportunities just like a Wall Street trading firm would. Which means that more often than not that loan didn’t go to help someone fix their car but rather to a bot carrying out a trading strategy.
Unfortunately, this epiphany is old news and I am even farther behind the curve than I thought because bots with pre-programmed algorithms are already facing competition from a new competitor, AI.
Already in 2023 the borrower may not even be someone’s bot carrying out pre-set instructions but an entity capable of making its own independent assessments on the fly to reach a broader objective. An AI can be given its own budget and api access and programmed to go and make money using the available platforms it can connect to in whatever way it sees fit. Its advantage over a bot is its ability to make judgement calls outside of its hard coded limits. If a bot won’t take a loan where the LTV is below 60%, the AI might go for 59% for example, or toy with bots to discover their flaws.
From a lender’s perspective, these are startling implications to think about. Given this dynamic I have been pondering how this might affect my approach to lending. One piece of advice I have already gotten is that becoming a manual p2p lender might not be the way to go.
“Sean, you know how you said old school p2p lending got taken over by bots and wall street automating loan approvals to borrowers? Well NFT lending is going to be even more efficient than that, bots lending to bots. I guess you could call it b2b lending.”