What Is Blur’s NFT Lending Protocol, Blend?

May 23, 2023

Key Points

  • Blur Lend (“Blend”) is a new NFT lending protocol for the Blur NFT platform.
  • It lets users take out ETH loans against NFT collateral or borrow ETH (i.e., buy now and pay later) to purchase NFTs on the Blur marketplace.
  • The protocol went live on 5/1/2023. Blend loans are currently supported across 3 NFT collections (Azuki, Cryptopunks, Miladys)
  • Total loans outstanding on Blend currently stand at ~$9.6M.

What is Blur’s New NFT Lending Protocol, Blend?

Blend is a new peer-to-peer perpetual lending protocol that supports NFT collateral. Its off-chain protocol matches borrowers and lenders while loan and interest rate payments are managed via on-chain Ethereum transactions.

The interface of Blend nft lending protocol on Blur

How do Blend Loans Work?

Theoretically speaking, Blend loans are “fixed rate” and have “no expiry.” They are made on a peer-peer basis without the need for intermediary oracles to set collateralization ratios.

Practically speaking, they are best classified as being “variable rate” and “variable expiry.” Lenders on Blend can, at any time, exit their leading positions by initiating a Dutch auction.

What is a Dutch Auction?

Typical (competitive) auctions conclude when the highest bidder is discovered. In these auctions, bidding starts at a low price and remains open until the highest bidder is found.

Dutch auctions conclude when the first bidder is discovered. In these auctions, bidding typically starts at an unattractive price (in the instance of Blend, a low APY for lenders) and gradually moves to a more attractive price until the first bidder is found.

In the case of Blend, once a lender initiates an auction process, the borrower has 30 hours to repay all of the outstanding principal and interest on their loans.

If the borrower does not repay the loan within that given time, the loan goes off to auction, where another lender can step in and refinance the loan. The auction starts at a 0% APY and ends at a 1,000% APY. If the borrower cannot repay their loan and no new lender is willing to refinance it, the NFT collateral is transferred to the lender.

This auction mechanism is the key defining feature of Blend and creates unique opportunities for both borrowers and lenders.

The Borrower’s Perspective on Blur’s NFT Loans

In contrast to other lending protocols with expiration dates, Blend’s auction mechanism provides a degree of flexibility but also introduces new risks for borrowers.

  • Loans automatically “roll over,” so borrowers no longer need to keep track of the expiry dates of their loans to avoid being liquidated.
  • Borrowers can also decide to repay or refinance their loans at any point in time if they want to get out of the loan or take advantage of lower interest rates.
  • However, borrowers do need to keep track of whether or not their lender has initiated an auction, in which case they would be required to repay/refinance the loan or forfeit their NFT collateral.
  • If the borrower does not have the borrowed funds (and interest) on hand, things could get messy.
  • The loan could get refinanced at a much higher rate. Imagine taking out a loan at a 10% APY and then having it refinanced at a 25% APY. Not fun.
  • If no new lenders are willing to refinance the loan, the borrower forfeits their NFT collateral. If the NFT collateral is worth less than their outstanding loan balance (and accrued interest), the borrower stands to realize a gain. If the NFT collateral is worth more than their outstanding principal and interest, the borrower stands to realize a loss.

The Lender’s Perspective on Blend

Extending loans via the Blend protocol gives lenders increased flexibility. They can initiate an auction to recover their outstanding loan at any time. Once they do this, a few different things can happen.

  • The borrower can simply repay the principal and interest.
  • Another lender could refinance the loan, and the lender would receive all of the principal and interest it is owed.
  • The auction could fail to find another bidder. In this case, the lender would take possession of the NFT collateral. If the collateral is worth more than the loan (and its accrued interest) they extended, they stand to realize a gain. If the collateral is worth less than the loan’s principal and interest, the lender stands to realize a loss.

So, Blend’s auction mechanism creates unique opportunities and risks for borrowers and lenders.

Similar to other credit markets, in a situation where the value of the collateral (in this case, NFTs) is increasing, it should be smooth sailing: Lenders earn interest on their loans which are backstopped by high-quality collateral. Borrowers pay interest on their loans but gain the opportunity to realize gains on their leveraged positions.

In a situation where the value of NFT collateral is nosediving, things could get messy. Lenders could be incentivized to close their positions to limit losses on NFT collateral sales. Borrowers could be forced to refinance at attractive rates and/or realize losses when their collateral is seized.

What is its Current Usage?

Just 24 hours after the launch, Blend is off to a hot start (relative to other NFT lending protocols):

  • Total active loans (#): 445
  • Outstanding loans (ETH): 5,161 ETH ($9.6M USD)
  • Median loan APY across different collections:
    • Azuki: 75%
    • CryptoPunks: 75%
    • Miladay: 161%

Incentivizing the Adoption of Blend

Like most things in crypto, the adoption of Blend is being incentivized. Blur is doling out reward points (which will later translate to BLUR tokens in an impending airdrop) to its lenders. The lower the APY that a lender is willing to lend at, the more points they will earn. And points are currently doubled for lending against select collections.

Following the conclusion of Blur “Season 2”, 300M+ BLUR tokens will be distributed to participants. Fees for Blend NFT loans (which would be charged on top of interest payments) are currently set to zero and will remain there for the first 180 days following the launch of the service.