What is NFT Seller Financing?
Seller Financing is a well-established tool in traditional finance that is emerging as a new primitive in the NFT landscape. In comparison to traditional NFT financing options which rely on third party lenders, Seller Financing is peer-to-peer (P2P) between buyers and sellers, where sellers set their terms for accepting payments directly from buyers over time. The flexibility of NFT Seller Financing has the potential to increase market participation.
What is Seller Financing?
Seller Financing enables sellers to 'be their own bank,' equipping them with the tools to attract a broader buyer base by adjusting their financing terms, including price, down payment, interest rate, and duration. Should a buyer default, the seller, acting in a bank-like capacity, retains all payments made and reclaims the asset to hold or resell.
Seller Financing has been used for decades in traditional finance to enable transactions banks wouldn’t underwrite or when sellers demanded prices buyers couldn’t afford.
Widely used in up to 90% of business sales, as well as in the sales of cars, boats, planes, and real estate, Seller Financing has increased transaction volumes across a variety of markets, especially in emerging, volatile, or hard-to-value markets.
Seller Financing for NFTs
NiftyApes, an NFT lending protocol backed by Coinbase and Variant, is the first to bring Seller Financing to the world of NFTs. Rather than build their own marketplace, they've developed a Seller Financing Software Development Kit (SDK) to empower any NFT platform — including minting platforms, secondary marketplaces, trading tools, and games — to provide Seller Financing options to their users.
Through a simple integration, NFT platforms can not only enrich their offerings but also stimulate transaction volumes, thereby fostering resilience throughout the NFT ecosystem.
What are the current NFT financing options?
Aside from credit cards, current NFT financing options — like those from Blur, NFTfi, PWNDAO, BenDAO, and ParaSpace — are limited to a few collections, usually just blue-chip NFTs.
Existing NFT financing options rely on 3rd party lenders to provide liquidity, which becomes problematic in bear markets when lenders may impose less favorable terms or withdraw their liquidity, hindering sellers and dampening the overall market. This reliance on profit-seeking middlemen also goes against the very ethos of cryptocurrency.
With Seller Financing, the paradigm shifts from a third party's ability to offer liquidity to a seller's willingness to receive payments over time. By disintermediating third parties, NFT Seller Financing promotes P2P relationships between buyers and sellers.
How does NFT Seller Financing work?
NFT Seller Financing is the process of listing an NFT, determining payment terms, delegating ownership, and transferring full NFT ownership once the payments are made in full.
Here is a description of the step-by-step process of NFT Seller Financing:
1. A Seller Lists their NFT
The seller lists an item for sale on an NFT marketplace that has integrated the NiftyApes SDK and sets financing options (either custom or pre-made) including price, down payment, duration, and interest rate.
2. The Seller Signs a Financing Offer
The seller signs their financing offer into the offer book, which records all offers made on the marketplace. The seller can define rules such as their sale price, down payment, payment duration, payment frequency, and a buy now price.
3. A Buyer Initiates the Purchase
A buyer initiates the purchase by making a down payment on the NFT and agreeing to the payment terms set by the seller.
4. The NFT is Transferred to an Escrow Contract
5. Buyer and Seller Ticket Minting
An ERC721 NFT is minted and sent to each wallet which represents both sides of the purchase as a buyer and seller ticket. Because these tickets are NFTs, they can be transferred or sold at any time.
The buyer ticket represents the debt obligation and the right to use the underlying NFT, and the seller ticket represents the revenue ownership of the loan and the right to seize the NFT if the buyer defaults.
Upon full loan repayment (or asset seizure) both tickets are automatically burned.
6. NFT Ownership is Delegated
Immediately after clicking “Buy,” the buyer becomes the delegated owner of the NFT and can start using it. The NiftyApes Seller Financing escrow contract delegates usage of the underlying NFT to the buyer ticket holder using Delegate.cash. This delegation of NFT ownership allows the buyer to use the underlying NFT anywhere delegate.cash is integrated. Such use cases include giving the buyer immediate access to token gated Discords, airdrops, and more.
What is delegate.cash?
Delegate.cash is an NFT delegation registry widely used to link cold wallets with hot wallets, so the hot wallet can act on behalf of the cold wallet, like crypto power-of-attorney.
Delegate.cash is being used by multiple NFT projects including:
- ForgottenRunes for their Halloween airdrop
- ArtBlocks for their gated minting processes
- TokenProof for wallet verification
- PunksClub for ownership verification
- InvisibleFriends for their 3D airdrop
- Collab.land and Vulcan.xyz for token gated discords
NFT ownership delegation enables the buyer to immediately start using the NFT while paying off their debt obligation.
7. Full NFT Transfer
The buyer makes payments until the purchase is paid in full. Once the seller financed purchase is fully paid, the NFT ownership is transferred out of the escrow contract to the buyer's wallet.
If the buyer fails to make a payment, the seller keeps all the payments made and can reclaim the NFT to sell again. Buyers are afforded a soft grace period where they can make a late payment up to one month late. However, during the soft grace a seller can seize the NFT at any time. Ideally, the soft grace period offers the buyer and seller an opportunity to communicate and keep the loan in good standing.
The Potential Impact of Seller Financing on NFTs
The introduction of Seller Financing in the NFT market has the potential to create far-reaching changes across the blockchain landscape by enabling sellers to provide their own financing terms, enhancing the transaction flexibility and financial accessibility of NFTs in a peer-to-peer manner that is congruent with the values of web3.
As this financial primitive for buying and selling NFTs becomes more prevalent, it has the potential to shape the evolution of the NFT market, broadening its appeal and reach to new and existing users.