In concept, NFT renting is as simple as its name suggests. Individuals who do not own a particular NFT, but would either like to use it or experience it for a limited time, may go out to a relevant platform that supports NFT rentals, and rent it.
The NFT rental industry will open up access to individuals who would like to experience a specific NFT which they cannot otherwise afford. This is similar to renting a race car for a day, other than having to pay half a million dollars to get one for yourself.
By enabling NFT lending and borrowing capabilities, owners can put their assets to work. NFTs can be rented in two different ways;
- Collateralized Lending
- Uncollaterized Lending
Collateralized Lending
Owners who want to rent their digital assets out can list them on a marketplace that supports NFT lending and borrowing.
When an interested party comes across the NFT, they can initiate the NFT borrowing process.
Upon initiation, the NFT is deposited into a smart contract. To protect the lender and their asset, the borrower is required to deposit collateral – likely exceeding the value of the NFT.
In addition, the renter will also need to pay a rental fee – to cover the cost of borrowing the NFT.
These terms are formalized in a smart contract, which will include other important details such as rental duration, terms & conditions and required collateral.
After all the agreement, NFT renting has begun. The NFT passes to the borrower, who can then use the asset for the duration of the contract.
When the contract expiration date arrives, the smart contract executes and returns the NFT back to its original owner. The NFT lending process concludes as collateral is released and then returned back to the borrower.
Uncollateralized Lending
NFT borrowing without the need for collateral begins in much the same way as when collateral is needed.
NFT owners put up their assets on a marketplace that supports NFT rentals, and individuals who come across the asset and are interested can initiate the NFT renting process.
The NFT is then deposited into a smart contract, with the terms of the contract defined between the lender and the borrower.
What makes it different from the collateral version is that in a collateral-less renting arrangement, a wrapped version of the original NFT is minted.
This wrapped NFT carries all of the same characteristics and attributes of the original asset and is, of course, backed by that asset.
Every other thing follows like the first instance and upon the end of the smart contract, the wrapped NFT is returned to the contract after which it becomes burnt.
The major highlight of this method is that the original NFT never gets into the hands of the borrowers.
