NFTFi Using Minimal Spare Funds: One Method via SharkyFi
Background
In recent discussions about NFTFi (strategies or otherwise) with people, I’ve noticed a recurring thought. More often than not, people assume you take the stance of being a lender or a borrower. That has inspired me to put together a quick summary on how you can use both methods simultaneously, as this is something that I frequently employ for my own NFTs.
The Method
This method is simply taking a loan out on an NFT that you own, and using the funds acquired to lend on collections. That is the entire strategy in a single sentence, but this sentence often raises a lot of red flags and concerns. If you have done NFT lending or borrowing before, think about that sentence before moving further and try to think of what concerns you would have. Not all, but many of those concerns can be mitigated with good risk management and some fine details to this strategy.
The one ingredient that I left out in this method is time, specifically the duration of the loans. We want to take out long-term loans, and provide short-term loans. These values are relative, we only need long-term to be some amount longer than short-term.
If this is done properly, the loans you are giving will provide more profit in interest than you will need when paying back the loans you have taken. Ultimately providing a free or even profitable way to constantly have a stop loss on your NFTs.
The Math
So, how or why does this work? To answer this we are just going to use a real example, you can simply replace the NFT and loan terms with other examples. The example provided is real data from SharkyFi so know that these terms are not made-up.
To set the stage, imagine you have 1 Sharx and 1 Transdimensional Fox (TFF) that we are going to take loans on. Additionally, we are going to provide loans for 2 Okay Bears Boomboxes. The terms on the loans that we are going to take and provide are the following:
| Project | Loan Amount (Sol) | Duration (days) | APY (%) | Repayment (Sol) |
| Sharx | 3.82 | 16 | 160 | 4.014 |
| TFF | 1.18 | 14 | 90 | 1.215 |
| Boombox | 2.45 | 7 | 180 | 2.498 |
| Boombox (x2) | 4.9 | 7 | 180 | 4.996 |
When we take out the loans on the Sharx and the TFF, we get 5 Sol (3.82+1.18). And we have the expectation to repay 5.229 Sol (4.014+1.215) when those loans are due in 14 and 16 days.
But we can take that 5 Sol and provide it to loans that are much shorter, because they frequently have a higher APY. So we can use 4.9 of our 5 Sol to provide loans to Boomboxes, and in 7 days should receive 4.996 Sol in return. Loans are often repaid a bit early on day 5 or 6. So for the sake of this, let’s assume that both of these loans were paid back before 7 days, that allows us sufficient time to provide additional loans again before our are due. So in that second week we loan out the same 4.9 Sol and receive 4.996 in return again just before our other loans are due. At this point we have used the same 5 Sol to accrue 0.192 Sol (0.096*2) in interest, which leaves us with a total of 5.192 Sol.
Now we need to repay our loans before they default, we need to repay 5.229 Sol (4.014+1.215). We didn’t quite make up that 0.229 interest entirely with our loans provided, so we will need to add some Sol to pay those back, but we have diminished the amount owned substantially.
This example provided was intentionally not a perfect scenario as we didn’t ‘make’ any Sol, but instead we got a very heavily discounted loan. There are a few scenarios where there are actually payouts, but this was intended to be a method of how to partake in lending without needing to tap into your own Sol pool.
Can it actually be profitable?
The easy answer is yes, but the profit tends to deliver in batches rather than slow, consistent profit that could be had from only lending. Any of these ideas can be stacked with one another, but here are some ways that I optimize this strategy to squeeze profit out of it.
Low APY collections
Only using this strategy for projects that have advantageous APY rates is a great way to optimize this strategy. What this looks like is finding long-term, low APY loans to borrow on your NFTs and finding short-term, high APY loans to provide loans to.
In my example provided in the section above, the TFF collection is an excellent example as the APY is only 90%. In this example, the TFF loan we borrowed against we needed to pay back 0.035 in interest, or 0.0297 per Sol borrowed (0.035/1.18). If we do that same math on the Sharx NFT that we borrowed against, we come out with paying 0.0507 per Sol borrowed.
Simply by only using this method with collections that have favorable APY, we can put ourselves in nearly a 50% discounted loan right off the bat. This single idea is the critical way to make this method consistently trickle in at least a little profit. I’m not going to walk through the math here, but I recommend working out the math to see what it looks like if you take loans on a 90% APY collection for 14 days and lend out to 220% APY collections for 7 days.
Defaults
Profiting from defaulted loans is one of the largest contributions to profit as a lender. And that holds true for this strategy as well. This is where it is important for the loans we provide to be shorter than the loans we are taking, because we need to account for some time to sell the defaulted NFT prior to paying back our loans.
This part relies on your making informed choices about which NFT collections to lend on. You want to opt for NFTs that you think will be stable in price and not have any volatility over the period that you are providing the loan.
Let’s imagine what this would’ve looked like in our example from the beginning. If even one of the Boombox loans defaulted, we would’ve been able to sell it on a marketplace immediately at the floor price of 4 Sol. That would’ve proved us an immediate realized profit of 1.5 Sol per Boombox that defaulting, and our total earnings from this example would’ve been over 1 Sol. It’s also worth mentioning that the defaults can be a source of loss as well as earnings, making wise choices in the collections you loan to is crucial to keeping this profitable.
Stop Losses
This part is exactly the same as the default, except from the perspective of being the borrower. The concept is simply taking advantage of if a floor price on our borrowed NFTs falls below the amount that we borrowed at, then we default on our NFT and can just buy a new one off the floor.
Much like defaults, this comes down to choosing the correct collections to take loans on that you think may have price volatility incoming. This part is simply a bonus profit rather than being a risk like defaults are, so it’s less critical to choose the correct loans to take, however it can help drastically for profit when this occurs.
Closing Thoughts
One thing I want to make extremely clear is that this method is not risk free. The idea behind this method is that it does not need to tap into your spare funds that may be doing other operations like staking, farming, etc. You should always have the amount of funds you need to pay back your loans on stand-by in the event your loans flop, your timing calculations are off, or any other reason. Having that back-up fund to bail yourself out of an unforeseen circumstance is necessary. If you cannot at any point do this, you are over-leveraging your positions, essentially lending/borrowing with money you don’t have and that is a very fast way to get stuck in a position where you lose a lot of funds. Be smart, be responsible.
With that said, let me drop a quick bullet list of priority lists that I use when deploying this strategy. My preference is always to take loans on collections that have these criteria, in this particular ranking:
- Long-term duration (just longer than what you are providing loans for)
- If providing 3-day loans, I won’t borrow on anything less than 7-day duration.
- If providing 7-day loans, I won’t borrow on anything less than 14-day duration.
- The short-term loan APY must be higher than the long-term loan APY.
- If this criteria is met, optimize the APY ratio. The higher this number is, the more likely you are to at least make a small profit. The formula to find the ratio:
(short-term loan APY) / (long-term loan APY)
- If this criteria is met, optimize the APY ratio. The higher this number is, the more likely you are to at least make a small profit. The formula to find the ratio:
- Borrow against any NFTs you have that have upcoming news, updates, or changes. Borrowing against these will be the best way to take advantage of the strategy detailed in the ‘Stop Losses’ section.
- If there is sufficient time to provide another round of loans before your loans are due to be repaid, do it. It does not need to be to the same collection over and over, look at the recent loan terms and find the right one to fit the time you have remaining.
- ALWAYS track your exposure and know what you are due to pay back and when. The more you do this strategy, the more moving parts there are and keeping things organized is the ONLY way to be sure you don’t get caught without funds when a repayment is due.