On July 10, a lender extended a $35,000 loan to an individual using a Patek Philippe watch as collateral via Arcade, a decentralized lending platform, with the watch being verified and held in escrow by the 4K Protocol. Patek Philippe watches are considered some of the most valuable watches in the world, with some fetching millions of dollars at auctions. 

The borrower engaged an escrow company to securely store the watch, which subsequently issued a unique non-fungible token (NFT) representing the ownership of the timepiece. This NFT was listed on the Arcade platform, where interested lenders could submit their loan offers. After reviewing the listed options, the borrower took a $35,000 loan from one of the listed offers.

To ensure the security of the transaction, the NFT representing the watch ownership was transferred to an escrow wallet. The NFT will be held in the wallet until the loan is fully repaid to secure the lender’s interest.

On the other hand, if there is a default, the lender will claim the Patek Philippe watch by burning the associated NFT. This mechanism ensures that the lender becomes the lawful owner of the collateralized watch.

As transaction data reveals, the involvement of an escrow firm, smart contracts, and NFT has simplified the lending process. Most importantly, the identities of the borrower, who owns the coveted watch, and the lender remain private. The trustless nature of crypto transactions means transactors don’t have to reveal their identities if they transfer value via non-custodial wallets like MetaMask.

Even though the involvement of NFTs in DeFi loans has opened up liquidity, allowing users to tap into global liquidity that can be supplied at any time of the day, there are cautions.

For instance, while the notable transaction highlights the potential of decentralized finance (DeFi) and how NFTs can be used as collateral in loans, it should be noted that NFTs are volatile like mainstream cryptocurrencies such as Bitcoin or Ethereum, for instance. 

In recent months, the value of popular NFTs such as Bored Ape Yacht Club (BAYC) and CryptoPunks has been free-falling following the crypto winter that spilled over from 2022. In the NFT industry, the floor price is the lowest price of an NFT in a given collection; for example, Azuki is currently listed for sale on a given marketplace, like OpenSea or Rarible.

OpenSea statistics show that the floor prices of BAYC NFTs have been falling, dropping by over 90% from $600,000 in 2021 to as low as 30 ETH as of early July 2023. At this pace, though BAYCs and other popular NFTs can be used to secure loans from willing lenders, the risk of asset price dumping can be deterrence, impacting liquidity. 

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