Why PawnSpace?

The current DeFi landscape allows you to put up a liquid asset in order to borrow another liquid asset, both with their associated volatility. This not only adds an added aspect of risk and liquidation for the borrower (when prices get too volatile) but also creates a barrier to what and how much can be borrowed. Collateralization in this manner has its benefits in the DeFi world, but with the tokenization of Real Estate, there becomes a need to collateralize these assets without having to sell them.

Most protocols in the DeFi space focus on Fungible Tokens which conform to the ERC20 standard. For example, if you have Ether, you can use it as collateral to withdraw DAI (a stablecoin). In essence, the user will collateralize one ERC20 token in order to “borrow” a different token. However, most cases require a borrower to possess more value for use as collateral than that will be borrowed. This over-collateralization does help in instant liquidity but limits funding possibilities. In traditional finance, it is similar to borrowing the Japanese Yen using the US Dollar as collateral. Yet, in reality, most debt is collateralized with tangible assets (i.e. real estate, stocks) instead. Non-fungible tokens (NFTs) are an alternative asset class to currencies within the blockchain space. On Ethereum, most NFTs follow either the ERC721 or ERC1155 token standards. NFTs are commonly used to represent unique artwork or as in-game items for use in a game. The potential for NFTs is to enable users to prove ownership of unique assets in a digital form. A mechanism for linking real-world objects such as real-estate and automobiles to NFTs is being actively developed and will come sooner or later to the blockchain. Due to their unique and individualized nature, pricing of NFTs is as challenging as pricing of real estate; there is currently no way to evaluate its true value beyond a “bid-and-ask” approach. The need for a universal and unbiased DeFi NFT trading product is ever in demand.

Current forms of NFT Financialization involves fractionalising NFTs or locking them up in vaults such as NFTX. This however takes away ownership of the underlying asset from the original owner and potentially gives rights to someone else to claim that NFT.

Hence, some people may not prefer fractionalizing their NFTs in pools for liquidity since they lose control/ownership of it, but they do not want to sell their NFT in the open market either. PawnSpace acts as a gateway for borrowers and lenders to safely and mutually agree on loan conditions and carry them out with smart contracts.

Example

Jacob wants to invest in and try out a new DeFi protocol but does not have enough liquidity on hand to do so. He is no longer comfortable taking out loans on AAVE as it would put his Health Factor in danger. Jacob however has some Decentraland Real Estate that he owns. He knows that his NFT real estate is really valuable and wants to keep ownership of it long term and hence cannot afford to sell it in the open market.

Jacob decides to use PawnSpace and list his NFT as collateral for a valuation & interest rate he deems is fair. Luckily, Belle an NFT & Decentraland Enthusiast sees Jacob's listing and feels that the valuation of the NFT is fair/undervalued and is willing to risk giving her funds to Jacob with the NFT as collateral in case of default. Belle agrees to an "Instant Loan" for Jacob's Loan Order, and the loan takes place smoothly.

Jacob receives his funds and tries to make profits on the new DeFi protocol he wanted to try out. He uses some of the gains to pay back the interest, gives back the principal and keeps the rest as profit. Jacob is happy as he receives his NFT back from escrow when he closes the loan. Belle is happy to get back her principal + interest from lending the loan.