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The Dual Nature of Blend’s BNPL Service in the NFT Market | by Sergey Vartanov Khachaturyan | Jun, 2023

Blend by Blur, an innovative lending platform in the NFT space, has introduced an intriguing Buy Now, Pay Later (BNPL) service that combines the flexibility of peer-to-peer lending with the fluidity of peer-to-pool lending.

While this service offers new opportunities for borrowers and lenders, it is essential to carefully assess the potential risks associated with Blend’s lending mechanism. This article explores the implications of Blend’s BNPL service, including financial instability, increased market volatility, risks in loan refinancing, overreliance on floor price, limited repayment options, lack of transparency and regulation, potential illegality, and the impact on attachment and emotional value of NFTs. Understanding these risks is crucial for participants in the NFT market to make informed decisions and ensure responsible lending practices.

Blend’s BNPL service allows users to borrow funds against their NFT assets, enabling them to make NFT purchases with deferred payments. The service incorporates features such as perpetual terms, no oracle-based liquidations, refinancing via auctions, and automatic loan refinancing. While it aims to provide liquidity and flexibility, it is important to consider the potential risks associated with these functionalities.

*Financial Instability and Debt Burden:*

Blend’s BNPL service introduces the potential for users to accumulate more debt than they can handle. The ease of borrowing and deferred payments may lead individuals to overextend themselves financially, resulting in difficulties in repaying loans, defaults, and a negative perception of the NFT market. This can discourage new entrants from participating and disrupt the overall stability of the market.

*Increased Market Volatility:*

By using borrowed funds to purchase NFTs, users may amplify price fluctuations and market volatility. Leveraged positions could force borrowers to sell their NFTs when the floor price approaches their borrowed amounts. This selling pressure may trigger cascading effects, leading to rapid price declines and market instability. The increased volatility resulting from these practices can undermine investor confidence and hinder the market’s long-term stability.

*Inherent Risks in Loan Refinancing:*

Blend’s automatic refinancing mechanism introduces potential risks for borrowers. Refinancing loans with new lenders may expose borrowers to unfavourable loan terms, such as significantly higher interest rates. This can increase the likelihood of loan defaults and negatively impact the reputation of the NFT market. Borrowers may find themselves caught in unfavourable loan agreements, exacerbating their financial burdens and potentially deterring their participation in the market.

*Overreliance on Floor Price:*

Blend’s BNPL service heavily relies on the concept of floor price as collateral. However, floor prices are volatile and subject to manipulation. Depending solely on floor prices as a measure of NFT value introduces uncertainty for borrowers and lenders. Inaccurate valuations can lead to misjudgments in loan amounts and repayment obligations, posing additional risks within Blend’s lending framework.

*Limited Repayment Options:*

Currently, borrowers using Blend’s BNPL service are required to repay the full amount of their borrowed balance. This limited flexibility in repayment options can create challenges for borrowers in managing their financial obligations.

*Lack of Transparency and Regulation:*

The text highlights the lack of clear regulations and oversight surrounding Blend’s BNPL service. This absence of transparency and regulatory framework can pave the way for predatory lending practices or market manipulation. Without robust safeguards and transparent regulations, concerns arise regarding the fair treatment of borrowers and the overall integrity of the NFT market. The lack of regulatory oversight can erode trust among potential users, hampering the broader adoption of NFTs.

*Potential Illegality:*

Operating within a regulatory grey area or potentially even being considered illegal in certain jurisdictions, Blend’s BNPL service may expose both borrowers and lenders to legal consequences. Engaging in unregulated or illegal lending practices can significantly damage the reputation of the NFT market and discourage new participants from entering the space.

*Impact on Attachment and Emotional Value of NFTs:*

While Blend’s BNPL service adds liquidity and flexibility to the NFT market, it also carries the risk of encouraging speculation and prioritizing trading over collecting. The availability of borrowed funds and the flexibility to enter leveraged positions may incentivize users to prioritize short-term profit-seeking rather than appreciating the artistic or emotional value of NFTs. The emphasis on speculation and trading may undermine the long-term growth and stability of the NFT market, favouring quick gains over fostering a community that values the artistic narratives and cultural significance encapsulated within these digital assets.

In conclusion, the interplay between Blend’s BNPL service, the adoption rates of short-term collateralized lending, and the changing sentiment within the NFT market present a fascinating landscape to watch. The future of the NFT market will depend on how stakeholders navigate these dynamics, striking a harmonious balance between financial innovation, artistic appreciation, and the preservation of emotional value within the NFT space.

Thank you for taking the time to read.

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