Future Application of BNPL

Authors: YL and Wilsonson

Introduction

“Buy Now, Pay Later (BNPL)” is an emerging type of consumption, especially during the pandemic. The main idea of BNPL is to let customers purchase an item by paying a down payment, then pay the rest of it before a deadline without credit. BNPL’s main difference from installment is that buyers don’t need credit points. In the traditional way, BNPL platforms will pay for the merchandise first, then transfer the customer’s debt to a risk-taking agency for them to request payment for the remaining parts. As for NFTs, buyers gain the right to use the NFT after the first payment, then gain ownership as the remaining payments are done.

During the growth of the NFT market, BNPL models for NFTs are proposed, and here comes the question, “Is it a good idea to adopt BNPL for different types of NFTs?” In this article, we will be discussing the BNPL models for NFTs, and take a look at several protocols on how they may affect the market.

Fund Matching

P2P Loan From Teller: Apenow

P2P matching is the simplest way to proceed with the system for BNPL. The only thing that platforms need to do is simply match the lenders and borrowers. This is very decentralized, but as we all know, P2P lending models have the problem of the lack of capital utility rate when there are few users. Let’s take Apenow as an example, Apenow uses Teller as primitive, buyers can follow the steps below to buy NFTs:

1. Borrower selects an NFT collection and accept the loan terms.
2. Pay the downpayment through Apenow.
3. Go to Teller WebApp to make recurring payments.

Apenow currently accepts two kinds of payment method, which is the monthly payment and P2P lending agreements. The liquidation risk of the monthly payment is taken by Teller users, while for P2P lending agreements, the risk is taken by one single user (also from Teller).

As we can see the process is pretty simple, borrowers borrow funds from lenders from Teller, Apenow just simply matches them together and escrows the NFT until the payments are completed. The process may be slow, but for NFTs (each one of them has different prices) this may be a decent solution.

Uses Bought NFT as Collateral: Npics

To improve the lack of capital efficiency of the P2P model, P2Pool is a common solution. Let’s take Npics as an example, Npics designed a mechanism called NEO+NBP, which works like this:

• NBP stands for NFT-backed Position, a batch of smart contracts that tokenizes each NFT debt position into NEO-NFTs.
• NEO-NFT is a copy of the purchased NFT, it is non-transferable by now (maybe transferable in the future), and the address which holds NEO-NFT will receive all claimable yields and airdrops through the flash claim service provided by Npics.

1. The borrower pays the down payment, borrows the rest through flash loan protocols, and finishes the purchase for the beloved NFT.
2. The NFT is deposited into a pre-selected loan pool as collateral and borrowed funds to repay the flash loan.
3. Creates a Vault backed on the debt position and mints a NEO-NFT as a synthetic version of the purchased NFT to the user’s address.
4. After repaying all debt in the vault, gain the original NFT and burn NEO-NFT.

Source: Npics Whitepaper

Summary: Apenow vs Npics, A Brief Comparison

There are some brief comparisons between Apenow and Npics in the following table:

How: Asset Management

Pricing

The pricing process is really simple for NFT BNPL but not accurate at all since each available token has a price on NFT marketplaces. Apenow currently supports Opensea, while Npics supports Opensea, Looksrare, X2Y2, and Sudoswap.

So, NFT BNPL does not have pricing problems like other NFTFi protocols, the price discovery process is more simple, also it does not require protocols to create a new market for BNPL, the market has already existed.

Minimum Payments

To Apenow, they have designed a down payment function to determine the down payment.

Source: Apenow Whitepaper

The down payment is determined by the NFT collection’s debt solvent ability, and the maximum down payment will be 50% of the price, and the minimum downpayment will be 33.78%. As for P2P agreements, users can decide the downpayment for themselves.

On the other hand, Npics also sets different rules for each collection by its trading volume, average asset sales value, interactions in dApps, community strength, and holders’ retention. The calculation method has not been revealed yet, but according to the Npics marketplace page, the downpayment of each NFT is above 50% of the price.

Interest Rate

According to Teller, the borrowing APR of Apenow pool fluctuates, and it is 28.33% before the deadline.

Npics uses BendDAO as its lending protocol to borrow out loans for repaying flash loans, therefore, the interest rate of the borrowed fund is the borrowing APR from BendDAO.

Liquidate Mechanisms

For Apenow, if a buyer fails to fulfill the payment agreement in time, the NFT will be sent to the paired lender’s (from Teller) wallet, and forfeit the buyer’s down payments. For monthly payment users, the liquidated NFT will be liquidated by Teller protocol users. The liquidator can get the escrowed NFT after liquidating the loan on Teller.

For Npics, liquidation follows the rule of BendDAO now since BendDAO is currently Npics’ lending protocol, the liquidation rules can be found in our previous report or BendDAO Doc.

How it Affects the Market

BNPL is an alternative payment method for buying NFTs, this may benefit several groups of buyers:

1. For buyers with little available funds in hand, BNPL can be a decent way to use the NFT.
2. Airdrop hunters can gain multiple NFTs before the airdrop event with fewer funds to gain numerous drops.

In general, BNPL has more benefits for buyers. As to sellers, BNPL protocols are free advertisements for their listings on marketplaces and provide them new access to sell their NFTs without taking risks.

As for different NFTs, there also are some differences between each of them.

• PFP: Blue-chip PFP NFTs have higher unit prices, which has more demand for BNPL services, and even more demand when airdrops occur since the drops are more attractive.
• Domain names: For domain names, ownership isn’t the first thing to take into account, therefore renting may be a better solution for domain names instead of BNPL.
• Gaming Items: Gaming Items are more dependent on the item price and use, as for games like STEPN, the shoes NFTs represent the users’ identity, therefore it has more of a PFP (also represents identity) trait, therefore this kind of gaming item has more demand of BNPL services.

Conclusion

As we mentioned, BNPL is an additional payment method for buying NFTs, in our opinion, NFT BNPL should be classified as an advanced lending process. As we can see in the previous chapters, Apenow is a loan matching platform for Teller users and NFT buyers. On the other hand, Npics integrates flash loan protocols and NFT lending protocols to accomplish BNPL. There are users for NFTs, and there are also users for lending. Therefore, whether there’s a demand for the combination of the two is the main question.

Despite BNPL being the combination of NFT sales and Crypto loans, the users are more based on the NFT sales market. Whether the NFT market is hot or not can cause a huge impact on BNPL services. If there is little demand for NFT sales, the meaning of providing BNPL services can be little. As for the current market of NFTs which has a low daily volume, BNPL currently has little demand and does not work out now, the interest rate is currently too high for BNPL. Web2 BNPLs have a much lower interest rate even none for buyers but transfer some of the costs to sellers. While for NFTs there is little demand for sellers implementing BNPL since the selling NFTs are spread among different users instead of big holders and there are few dedicated NFT selling institutions. Therefore, we propose to the current market, the “mint now pay later” method, by implementing this method, there will be several advantages:

1. Protocols (as the role of retailers in web2 BNPL) can use BNPL services to promote their NFT projects by paying commission fees to BNPL providers (maybe NFT lending protocols which have the ability to liquidate NFTs).
2. Buyers can mint NFTs with little budget and less interest rates, which can significantly improve user experience.
3. Provides a new method for the market to discover the value of the NFT project.