The NFT lending sector is structured into four models

Peer-To-Peer NFT lending

The simplest form of NFT lending is the Peer-To-Peer (P2P) protocol, as it closely resembles the borrower-lender relationship found in banks.

Most Peer-To-Peer lending platforms use a simple bidding system that allows anyone to provide loans and set terms without a centralized or third-party intermediary.

The user lists their NFT on the platform and receives loan offers based on the lender's perceived NFT value. If the borrower accepts the offer, they immediately receive digital assets from the lender's wallet. At the same time, the platform automatically transfers the borrower's NFT to a digital safe (smart contract) until the loan is repaid or expires. If the borrower defaults on the loan, the smart contract will automatically transfer the NFT to the lender's wallet.

Peer-To-Protocol NFT lending

While Peer-To-Peer NFT lending allows for customizable loan terms, Peer-To-Protocol NFT lending platforms allow you to borrow directly from the protocol. Like DeFi lending protocols, these NFT lending platforms rely on liquidity providers to add assets to protocol pools. Borrowers have access to liquidity immediately after collateralizing their NFTs and locking them in smart digital vaults (smart contracts).

Non-fungible debt positions

One of the oldest platforms in DeFi, MakerDAO is known for its collateralized debt position (CDP) structure. It allows borrowers to choose the stablecoin DAI when they collateralize ETH.
According to a similar model, the non-fungible debt position is offered by the JPEG'd platform, which is currently the only one operating for this NFT lending style. This platform allows users to collateralize blue-chip NFTs such as CryptoPunks, for which they can borrow the synthetic stablecoin $PUSd, which is pegged to the US dollar 1:1. As a borrower, you can use $PUSd to provide liquidity on the protocol to earn interest, or you can exchange them for other cryptocurrencies and look for opportunities elsewhere. After paying off the loan, you can take your NFT back.

NFT rentals

This type of NFT lending allows holders to rent out their NFTs in exchange for capital. Platforms of this style work like Peer-To-Peer marketplaces, allowing landlords and tenants to trade different rental terms without waiting for permission.
All rental transactions are managed by smart contracts, but instead of the borrower sacrificing the NFT as collateral and locking it in a digital vault, the NFT is transferred to another person's wallet for a given period. In exchange, the "borrower" receives an agreed amount of cryptocurrency. After the predetermined period, the NFT is automatically returned to its owner. This is a simple form of NFT lending as there are no repayment terms, interest, or liquidation concerns.

NFT lending advantages

• Portfolio appreciation without the need to sell your favorite NFT
• Thanks to NFT rental, you can get access to rare NFTs, contact people, and have experiences that you would not otherwise access
• NFT loans provide owners with a means to generate tax-free income, as opposed to the tax-related consequences of sales

NFT lending disadvantages

• Financial investment in NFTs presents a few risks, such as sudden drops in the cryptocurrency market, smart contract exploits, rug pulls,and  regulatory interventions
• There is a lot of fraud going on in the cryptocurrency world. Even if many of these platforms are audited, an audit does not guarantee security. It only points out errors in the platform's code if the auditor discovers them.
• The possibility of liquidation

How can I choose a suitable NFT lending platform and thereby reduce the risk of losing my digital assets?

1. Verify the team’s credibility by looking at other projects, activity on social networks, and community references.
2. Study the whitepaper of the given project in detail.
3. Check if the project code has been audited by a third party. The best lending platforms use audits from several auditing companies, meaning they can largely prevent one of them from overlooking an error in the code.
4. Watch for potential red flags – such as unrealistic returns, or excessive spending on promotion and marketing.

Conclusion

Whether NFT lending is the right decision for you depends on your time horizon and risk tolerance. As with all crypto protocols, it's essential to do your own research and never invest money you aren’t prepared to lose.

Personal Opinion

NFT lending is a new and rapidly developing sector in the world of digital assets. At the same time, it is a great opportunity to increase your NFT’s use and ensure appreciation over time.
However, beware of the number of scams that are happening in the current NFT world. Fraud platforms are still being created with the intention of stealing your NFTs. Before using any of them, do your own research by checking who is behind the project development, what the developers’ history is, and if they have KYC. Study the whitepaper and check the audit code reports. We should never underestimate the role of cyber security, because even one incident - for example, a bug in the code and a subsequent hacker attack on the platform - can destroy the future of the whole project. You could lose money and this would negatively impact general motivation to invest time and money in digital assets and Web 3.0. Always be prepared to take a certain amount of risk and diversify your investments wisely. Your main task is to ensure that you get consistent profits with the least amount of risk possible. Always DYOR!