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Aave founder reveals: NFT collateral support coming soon! Collateral liquidation mechanism sparks community discussion

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Aave founder reveals: NFT collateral support coming soon! Collateral liquidation mechanism sparks community discussion

Today, Aave founder Stani Kulechov announced that Aave will soon support collateral for non-fungible tokens (NFTs).

Aave to Support NFT Collateral

Aave founder Stani Kulechov announced this news on Twitter today, June 4.

However, due to the unique nature of NFTs compared to regular tokens, where transactions typically occur through auction mechanisms and their value is more subjective compared to regular tokens, coupled with high price volatility and market manipulation concerns, NFT collateral poses a high risk of default under Aave's current collateral liquidation mechanism. Therefore, upon the announcement by Aave's founder, most people's initial concern is how the liquidation of NFT collateral will be handled?

https://twitter.com/alexgausman/status/1400640513062039555

Most speculation suggests that Aave may operate the borrowing and lending of NFTs in a peer-to-peer manner. This means that before each NFT lending transaction takes place, the borrower must find a buyer for the NFT, and both parties must agree on parameters such as liquidation price, loan interest rate, and loan term. Consequently, if the borrower fails to repay, the lender can acquire the desired NFT at the agreed price, even if the NFT's value drops significantly, as the risk is borne by the lender (as they have agreed to the liquidation price) and does not pose systemic risk.

Uniswap v3's LP Lending Market?

Another possibility is that Aave's NFT collateral market this time is created for Uniswap v3 LP tokens. Previously, Aave had created a lending market for liquidity providers of automated market makers (AMMs) using LP tokens as collateral, but as Uniswap v3 LP tokens are NFTs rather than standard ERC20 tokens, they cannot serve as collateral in the LP token lending market.

Since LP tokens are certificates that can be redeemed for cryptographic assets, even though Uniswap v3 LP tokens are NFTs, their current market value can be calculated based on the price of cryptographic assets. Therefore, a lending market can be established with a similar collateral liquidation mechanism.