Selling your NFTs means losing the ownership of that particular NFT asset. Hence, if you are long on the NFT asset and just want to keep it for a long-term, you would not be entitled to the potential upside value gain. By borrowing you are able to obtain liquidity (working capital) without selling your NFTs. Users are mainly borrowing for unexpected expenses, leveraging their holdings or for new investment opportunities.
Browse to the "Borrow" section and choose a NFT collateral collection. Each NFT collateral collection correspond to a lending pool, which allows the NFT collection as collateral and multiple tokens as loan assets.
Before borrowing you need to deposit any NFT that can be used as collateral in the pool.
Each deposit of a single NFT will require an additional approval transaction. But you can click "Approve All" button to set approval for all NFTs in the collection at a single transaction.
After this, simply head to the Borrow section and click on “Borrow” for the asset you want to borrow.
Then set the amount you need based on your deposited NFTs that would be used as a collateral for the loan.
The maximum amount you can borrow depends on the NFT value you have deposited and the available liquidity. For example, you can’t borrow an asset if there is not enough liquidity or if your health factor doesn’t allow you to.
In order to payback the loan you simply go to the Borrow section and click on the repay button for the asset you borrowed and want to repay. Select the amount to pay back and confirm the transaction.
You repay your loan in the same asset you borrowed. For example, if you borrow 100 Dai you will pay back 100 Dai + interest accrued.
The interest rate you pay for borrowing assets depends on the borrowing rate which is derived from the supply and demand ratio of the asset.
The health factor is the numeric representation of the safety of the value of your deposited NFTs against the borrowed assets' underlying value. The higher the value is, the safer the state of your funds are against a liquidation scenario. If the health factor reaches 1, the liquidation of your deposits will be triggered. A Health Factor below 1 can get liquidated. For a HF=2, the collateral value vs borrow can reduce by 1 out of 2: 50%. The health factor depends on the liquidation threshold of your collateral against the value of your borrowed funds.
Depending on the value fluctuation of your deposited NFTs, the health factor will increase or decrease. If your health factor increases, it will improve your borrow position by making the liquidation threshold more unlikely to be reached. In the case that the value of your collateralised assets against the borrowed assets decreases instead, the health factor is also reduced, causing the risk of liquidation to increase.
There is no fixed time period to pay back the loan. As long as your position is safe, you can borrow for an undefined period. However, as time passes, the accrued interest will grow making your health factor decrease, which might result in your deposited assets becoming more likely to be liquidated.
In order to avoid the reduction of your health factor leading to liquidation, you can repay the loan or deposit more NFTs in order to increase your health factor. Out of these two available options, repaying the loan would increase your health factor more.