Today, we explore what Honey’s innovations means for you, whether you’re an NFT collector or yield chaser looking for new (and safe) DeFi opportunities.
Honey firstly focuses on protecting lenders, by reducing the overall risk in the protocol, while also achieving capital efficiency to improve yields. This is made possible by our platform approach to lending, allowing an enormous amount of flexibility for both lenders and borrowers, ensuring that we always find the best rates available to them.
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Yawww, NFTfi, SharkyFi*, Arcade, etc.
P2P lending protocols make an important tradeoff: higher customisation and low protocol risk at the expense of lenders. With P2P, lenders often play an active role in creating loan terms and frequently redeploy liquidity. Additionally, lenders need to accept that in case of default, they obtain an NFT instead of their money back. This additional risk of illiquidity should result in borrowers paying a premium to lenders.
This is suboptimal for borrowers, who have to pay extra, and for lenders, who have the burden of manually liquidating NFTs.
The result is a higher interest rate for borrowers and a more tedious and risky experience for lenders.
P2P lending protocols for NFTs date back to early 2020, but have struggled to find product market fit since, as illiquidity remains a significant problem 2 years later.
P2P creates multiple problems:
The tell-tale sign of a peer-to-peer lending protocol is when the lender receives the borrower’s bad debt during a liquidation. *Wether through an order book or marketplace: the lender is left with the bad debt, forced to handle the loss.
Of course, some people are okay with receiving an NFT in the event of a liquidation, but when that happens, it suggests the NFT is losing value. The market for people who would accept this depreciating asset is significantly smaller than the normal DeFi market of people who want to receive passive yield on their liquidity.
This is where liquidators come in, to reduce the risk for lenders. On Honey, liquidators benefit from a range of mechanisms and incentives that ensure markets stay healthy and lenders can remain passive.
However, what P2P lacks in user experience, it can make up for in its capital efficiency and flexibility. That’s why we do believe that peer-to-peer lending will serve an important and underrated role in DeFi, but one that is very different from how we know it today.
That was our vision for building Honey P2P, a fixed duration lending protocol which will plug into our Peer-to-Pool protocol as a layer 2 application. The early mainnet prototype is already live here and will be fully launched in Q4 2022 with a new UI. This hybrid layer 2 approach allows us to fill the gaps in the Peer-to-Peer design but keep the benefit of increased customisation.
It’s easy to see how Honey improves upon the peer-to-peer design, by offering instant liquidity to its borrowers and safer yield to its lenders. However, most of the team’s effort have focused on improving upon the peer-to-pool model.
Peer-to-Pool is an effective method of offering instant liquidity. However these protocols trade safety in exchange for this instant liquidity. The liquidated NFTs are collected by the protocol, which is tries to resell using raffles or auctions. The auctions happen after the NFT has been liquidated (that is, after the borrower defaulted on their loan). These protocols attempt to sell these declining assets as fast as possible to pay back lenders.
If the auction or raffle fails, the consequences are disastrous. The bad debt is held by the protocol and its DAO, as it hopes that NFT floor prices rise again… 🤞
We hear you, that’s why Honey allows these auctions but before NFTs are liquidated and not afterwards. As loans are created, liquidators can bid on the debt, resulting in an order book of bids for each market. As a collector, here is your chance to scoop up discounted NFTs, and as a protocol, we avoid holding bad debt in the form of liquidated NFTs.
This results in predictable and effective liquidations, reducing the risk in the entire system by never holding on to bad debt. A weak or unpredictable liquidation engine is a disaster waiting to happen, and lenders end up paying the price.
Honey’s liquidation engine also utilises NFT AMMs to instantly sell collateral. The instant nature of an AMM is how Honey can pull off never holding on to risk (bad debt).
While using an NFT AMM in liquidations is not new, Honey serves as an aggregator, giving the protocol access to vastly more liquidity and volume to run liquidations.
The more capacity a lending protocol has for liquidating, the more debt its able to issue. This means that Honey, can securely issue up to 3x to 5x more debt than competitors, with it’s 7 possible layers of liquidation. This is true scalability for NFT liquidity. More debt, less risk, better loans.
Honey’s most important stakeholders are called admins. Simply put, market admins turn Honey into a platform, where lending markets can be spun up by individuals or DAOs.
This platform approach allows Honey to offer an almost infinite range of markets, on the widest range of collections. Similar markets can exist for the same collection, but with very different settings. Over time, liquidity and volume will flock to the market with the best parameters, in a natural selection process designed to benefit borrowers.
This platform approach creates two major benefits for users:
Similar markets on the platform are meant to compete with one another for your liquidity, and your loans.
Competition between markets drives down interest rates and forces optimisation. This ensures that our rates always stay competitive, if not lower, than other NFT lending protocols with single market approaches.
In the end, the user wins from better quality markets with better rates.
Market admins also ensure that Honey offers a large variety of loans and collections. Because markets are created by individuals, the protocol can feature any set of markets: combining new collections with creative market settings. Whereas most protocols are limited to bluechips when offering loans, the permutations of markets and collections available on Honey is immense.
DAOs and individuals which elect to become market admins can create the markets that work best for their collection, with a level of customisation that can’t be found anywhere else. This puts NFT projects and their founders back in control, offering them a new revenue stream through market admin fees.
This incentive also means liquidators will execute the most profitable trades in the NFT AMMs or order books that offer the best price.
Honey’s modularity and open-source nature means it can remain flexible and future-proof. Market admins will be able to add new NFT AMMs and liquidation mechanisms as they are invented in the future.
Through it’s open-source design, Honey is completely changing who can participate in NFT x DeFi, opening it up to everyone. Users are not having to compensate for some NFT holders paying discounted fees, and liquidation opportunities are available outside of the DAO.
Market admins or liquidators represent a new revenue opportunity for community members and collectors looking to earn in web3.
This is an important shift from many NFT protocols, crippled by the pressure to offer holder benefits.
Instead, Honey’s NFT and token are designed to play an important but non-intrusive role in the protocol. They allow holders to obtain governance and rewards from the project’s success, but in no way hinder the experience of other users or make the platform uncompetitive.
It’s time to democratise NFT lending and its opportunities for all. This not only makes lending more attractive on Honey but secures the protocol through network effects as it continues to grow.
The revolution starts with Honey’s beta launch, with daily updates based on user feedback. After the beta, liquidity mining rewards will be announced, as we continue with a Q4 full of new features which will push the boundary of liquidity for NFTs and long tail assets.