Introduction
As we covered in Part 1 of this series, SharkyFi offers strategic opportunities for both Lenders and Borrowers. In this concluding instalment, we’ll delve deeper into these concepts.
Lender Considerations
Lenders will utilise this platform primarily to:
- Earn yield on their SOL, aiming for a rate higher than staking offers; and/or
- Potentially acquire an NFT at below-market value if the borrower defaults.
However, using any platform involves risks. The primary concern is loans going underwater, where the NFT’s market value falls below the loan amount. It often becomes more advantageous for the borrower to default and retain the initial loan rather than repaying it. Therefore, it’s crucial to consider the Loan to Value (LTV) ratio among other factors detailed below.
NFT Price Action
Lenders must monitor the price trends of the NFTs they’re lending against. The NFT market is fast-moving, and prices can shift dramatically. A loan term can suddenly seem very lengthy if the collection’s floor price starts to drop towards the loan value.
Staying informed about fundamental developments, market sentiment, and employing technical analysis tools like Sniper can help lenders decide when it’s wise to lend against an NFT.
Solana Price Action
The recent surge in Solana’s value has notably impacted the NFT market, demonstrating that:
- Most users price their NFTs based on their USD equivalent. As SOL’s value increases, NFT floor prices often decrease to match the USD valuation.
- A rise in Solana’s price prompts many users to sell their NFTs, favouring native SOL over their digital assets.
Essentially, a spike in Solana’s price can lower an NFT’s floor price, potentially affecting your loan’s value. Although you may not lose in terms of USD value, if your objective was to gather more SOL, this situation doesn’t meet that goal.
Borrower Considerations
Quick Liquidity
The primary motivation for borrowers is often spotting an opportunity but lacking the necessary capital to engage. SharkyFi enables users to quickly obtain liquidity by using their NFTs as collateral. If everything proceeds as planned, the user can capitalise on the opportunity, repay the loan, and secure the profit.
However, caution against overleveraging is crucial. Not all strategies succeed, and aggressive leveraging can swiftly lead to financial pitfalls if the ventures fail and loans become unpayable. Users risk losing their assets quickly if they do not manage their borrowing wisely.
Hedging
Loans can serve as a strategic hedge for users anticipating a drop in their NFTs’ floor price. With a favorable Loan to Value (LTV) ratio, an owner can secure SOL liquidity without relinquishing their NFT. If the NFT’s floor price decreases, the borrower can keep the SOL from the loan and forgo the NFT. Otherwise, they can simply settle the loan.
This strategy was notably effective during the buildup to Season 3 of DeGods on Blur. Given the excitement and speculation about the launch, many opted for loans against their NFTs as a safeguard against potential disappointment. This approach proved beneficial for those who implemented it.
General Considerations
Sharky have had a long-standing points system where users earn points for their activity which is then tradeable for $FISHY.
Furthermore, the upcoming launch of the $SHARK token has seen the platform introduce points farming as people claim eligibility for the token based on their activity.
Details of how these mechanisms work are outlined in this article.
Useful Tools
Analytics platforms like Monkey Baby Business can offer insightful statistics on current loan activities, including the prevalence of underwater loans which may indicate a risk of widespread liquidations.
In a scenario where many loans go underwater, borrowers might opt to default, valuing the loan’s initial amount over the NFT’s diminished value. This situation forces lenders to possess NFTs valued lower than the loan amounts. Lenders might hold onto the NFTs if they believe in their long-term value or attempt to sell them immediately to minimise losses.
The impact of underwater loans can be significant, particularly during times when users leverage their NFTs to speculate on volatile assets like memecoins. While outcomes vary, the potential for such scenarios should be taken into consideration.