When it comes to DeFi lending, it’s no surprise that over-collateralization has often been a challenge when considering how permissionless lending can make its way to the unbanked.

We’ve seen projects like Zero Collateral Loans begin to experiment with undercollateralized loan systems that allow borrowers to earn trust with the more capital they borrow (and repay).

Today, we’re seeing a new form of collateralized lending proposed by a project called Rocket.

Rocket leverages NFTs as loan collateral – only querying funds after careful due diligence has been performed on the borrower surrounding the context of why they’d like a loan in the first place.

Rocket’s cofounder, Alex Masmej says:

“I believe the NFT market will explode in the 2020’s. There are billions of potential use cases. Rocket loans will help leverage a completely unexploited market so far in #DeFi.”

The project is structured as a fork of Moloch DAO, meaning all funds are held in a smart contract, and can only be dispersed given consensus from the Rocket community at large. The project has collected roughly $10k in ETH and leverages an “NFT Bank ” to store posted collateral. The current thought process is to start with microloans and gradually increase lending capacity over time.

Why Rocket?

On the lending side, it’s expected that returns will be higher than those offered through the Dai Savings Rate or products such as Compound due to the inherent risk of more obscure collateral types.

On the borrower’s side, NFT values are largely speculatory, meaning that those posting valuable collateral stand to *potentially* have the value appreciate relative to the price of a more standard asset like Ether.

Due to the unorthodox nature of Rocket Loans, the project will initially start with a thorough application and due diligence process as to ensure loans are being distributed to those who *should* be able to be trusted.

Over time, it’s likely that the standard for what deems an NFT “valuable” (i.e. providing a framework for which NFTs are recommended) will make the process more automated.

For now, examples of “valuable” NFTs are likely to include:

What’s important to note here is that the market for second-hand trading of NFTs is constantly evolving. With sites like OpenSea and Nifty Gateway, the potential for NFTs to be liquidated in the event loans aren’t repaid becomes much more feasible.

“Another relevant thing to mention is that enough collateralized NFTs (in most cases, users will have to put down multiple NFTs, unless it’s a very valuable one) can actually reveal someone identity: as Balaji S. Srinivasan previously stated, enough “bits” (pieces of data about yourself) can reveal who you are.”

Combined with the sentimental value that NFTs may have to their creators, it’s interesting to consider a world in which people can post treasured belongings in exchange for microloans. In this scenario, we can imagine a borrower feeling much more pressure to repay the loan sooner, as to ensure they can reclaim their belongings as soon as possible.

Until then, we’ll be keeping a close eye on Rocket via testnet as it gears up for its full launch in the coming months.