If you hold an NFT and need cash without giving it up, selling is not the only option. A category of lending protocols lets you use that NFT as collateral for a loan instead. You keep ownership of the asset while it sits locked in a contract, and you get a loan in ETH or a stablecoin in return. This guide covers how that process actually works, how it differs from the token lending you may already know, and what can go wrong.
How this differs from ordinary crypto lending
Most crypto lending works with fungible assets. If you deposit ETH or USDC as collateral, the protocol can always know its exact market price from a live feed, because every unit is identical and trades constantly across many venues. That price lets the protocol calculate your health factor and decide the moment to liquidate you, a mechanism covered in our earlier guide on health factor and liquidation thresholds.
An NFT breaks that model. No two NFTs in a collection are guaranteed to be worth the same amount, and even the "floor price" of a collection, the lowest ask on a marketplace at a given moment, can be a thin and unreliable number if few people are actually buying or selling. A protocol cannot safely automate liquidations against a price that might reflect a single stale listing. That single problem is why NFT-backed lending ended up built differently from token lending, in two main shapes.
The peer-to-peer model
In the peer-to-peer model, there is no shared pool of funds and no automatic price feed at all. A borrower lists an NFT along with the terms they want: how much they want to borrow, for how long, and what interest rate they are offering to pay. Lenders browse these listings and choose to fund the ones they find acceptable, much like a private loan negotiated between two people rather than a loan taken from a bank's general reserves.
While the loan is active, the NFT sits locked in a smart contract rather than in the borrower's wallet. If the borrower repays the loan plus interest before the deadline, the contract releases the NFT back to them. If they do not, the lender is entitled to claim the NFT itself as repayment. There is no partial liquidation and no grace period beyond what the contract specifies. The outcome is binary: repay in full and in time, or lose the asset.
This structure means the lender is underwriting a specific NFT and a specific borrower, not reacting to a live price feed. Interest rates in this model have historically run much higher than typical token lending rates, reflecting how illiquid and hard to value the collateral is.
The pool-based model
A second shape looks more like a conventional lending pool, with a twist. Instead of negotiating with an individual lender, a borrower deposits an NFT and draws a loan from a shared pool of liquidity, usually against a limited set of approved collections rather than any NFT. The protocol relies on an oracle or a periodically updated valuation for those specific collections to decide how much can be borrowed and when a position becomes unsafe.
Because NFT valuations are so much less reliable than token prices, these pools tend to be conservative: borrowing limits are set well below the apparent floor price, and the protocols that run them have experimented with different ways of updating valuations, from relying on recent sales to running their own internal auction mechanisms when a loan needs to be closed out. The details vary by protocol, and some have changed their pricing approach after learning the hard way that a stale number is dangerous for everyone involved.
What can actually go wrong
The most direct risk is losing the NFT outright. In the peer-to-peer model, missing a repayment deadline by even a small margin typically means forfeiting the collateral, with no mechanism to top up or negotiate an extension unless the lender agrees to one. In the pool-based model, a sharp drop in a collection's floor price can trigger a liquidation in exactly the way a falling ETH price would trigger one in ordinary collateralized lending, except the thing being sold off is a specific, non-fungible item rather than a fungible token.
Smart contract risk applies here just as it does anywhere else in DeFi. A bug or an exploited vulnerability in the lending contract can put locked NFTs at risk independent of whether the borrower ever misses a payment. Our guide on common smart contract vulnerabilities covers the general category of issue, and it is worth checking whether a protocol has been audited before locking anything valuable into it.
There is also a narrower, easy to overlook risk: approvals. Using an NFT in one of these protocols generally requires granting the lending contract permission to transfer that NFT, the same kind of approval covered in our piece on NFT approvals and setApprovalForAll. That permission should be reviewed and revoked once you are done, rather than left standing indefinitely.
Before you borrow against an NFT
Treat this the same way you would treat any loan secured by an asset you care about: understand exactly what triggers forfeiture, read the specific terms of your listing or your position rather than assuming they match what you have read elsewhere, and only borrow an amount you are genuinely prepared to lose if the market moves against you or you simply cannot repay in time. An NFT you are not willing to lose is not a good candidate for this kind of loan, no matter how attractive the terms look.
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