The first loan I ever made on Teller paid off today. The terms had been generous, a .2 weth 30-day loan at only 1% APR against the name makerlee.eth as collateral. Makerlee is actually Teller’s content manager. This friendly deal, which stood to earn virtually no profit for myself at all, nevertheless had a rather unfortunate outcome even though it paid off.
When I made the loan, .2 weth was valued at $380. Now, 30 days later, .2 weth is worth $329. That’s because ethereum recently crashed against the dollar. Exchange rate risk is a significant risk in NFT lending so it is something that both borrowers and lenders have to build into their strategy. Assuming no transaction fees, a borrower could use NFT loans as a derivative bet against the future direction of the cryptocurrency.
Borrow .2 weth, for example, exchange it for USDC, hold it for 30 days and then swap the USDC into lower priced weth on the day the loan is due. This would’ve yielded the borrower a nice little profit in the current environment assuming there were no transaction fees. Now imagine the stakes were 100 weth or more. But are you really prepared to make such bets? Maybe it’s not a good idea. I don’t think I could personally time the market, for example.
Although I was a loser on the exchange rate, I am still a winner. If the lender does not lend the weth at all, then more dollars are lost just holding on to the weth. .201 weth is still better than .200 weth, for example. So crypto lenders gotta lend even if the value of ethereum is going down against the dollar. That is unless they feel a need to sell off their weth for stable coins to protect their dollar valuations and then just buy back in later. That also seems like trying to time the market all over again, which is a lot more than a typical short term lender is expecting to worry about. Personally, I know that 1 weth today will still be 1 weth tomorrow. If I sat here and worried every single minute about what the value of ethereum was against the dollar, I’d drive myself crazy. Lenders, especially peer-to-peer lenders, like to lend for a predictable rate of return. They’re not going to be forex derivative experts.
All of this comes back to my theory about what would make for appropriate collateral given all these risks. In a world where the value of every cryptocurrency and digital art NFT is plummeting and all the loans are defaulting, what in the heck would make a lender feel like they could be made whole? The answer is a digital asset I can USE to make money, either in crypto, dollars or otherwise. That’s how I see it anyway. I like things like web3 names and domain names. I can use them to make money.