The first generation of blockchain games typically required players to own one or more NFTs— a costly investment which creates a high barrier to entry for newcomers to try out the game. To solve this problem, many games have created scholarship programs like YGG, OLA GG or Merit Circle where players can lend their NFTs to each other so anyone can enjoy the game without an initial investment. This trend along with limited “free to play” modes are being adopted by most if not all games in the space.
Put simply, the basic idea of NFT rentals is that NFT owners can rent out their digital assets for temporary use for various purposes. This is a relatively new concept, but as it continues to gain traction within NFT communities, it has the potential to significantly impact the broader Web3 landscape.
Current approaches to NFT Rentals
There are currently four approaches to NFT Rental, each with it’s limitations and risks:
Approach A) Wrapped NFTs
Instead of giving the original asset to the borrower, the rental protocol mints an expirable version of the NFT (which contains all of the unique features and metadata of the original). This wrapped version of the NFT is then given to the borrower.
The protocol secures the original NFT which is returned to the owner after the agreed-upon rental contract has expired. Now, token holders can enjoy the benefits of renting out assets that they aren’t currently using, but that they would not like to sell.
The problem with this approach: the borrower is not actually using the NFT but a wrapped version, which is not elegible for Airdrops. Also, as the borrower is not holding the real asset, there is a risk that other protocols and systems won’t consider it valid (ie: game server authentication scheme)
Approach B) Upfront rent payment via registry smart contracts
This approach requires the borrower an up-front payment that enables NFT rentals without collateral. The NFT is put into escrow in a registry smart contract. The smart contract assigns a use right to the renter when the NFT is rented. The project that wants to make use of collateral-free renting must check the registry contract to see if someone is renting an NFT, therefore this solution requires integration between the rental protocol project smart contract and the client project.
The problem with this approach: the borrower has to pay all the rent upfront, putting a friction to the rent.
Approach C) Collateralized Rentals using smart contracts
In this method, the owner will transfer ownership of the NFT to the user with some collateral or conditions to ensure that the renter will return ownership after the rental period is complete. Once the NFT is rented out, the original owner has no control over it, which creates many potential risks:
A collateral is a huge barrier for people to rent because rent often makes sense due to a lack of funds
If the value of the NFT changes and becomes higher than the collateral, the lender is at risk
The renter can use the NFT as collateral for a loan without asking permission from the lender
Approach D) Develop the rental smart contracts in-house
The project can develop its own smart contracts and control the rental experience end to end. This is the case of Splinterlands, using the Hive blockchain. The benefit of this approach, is that you can control the rules and adjust them as you go.
The problem with this approach is that you need to develop all the rental solution in-house, which can be prohibitive to most projects.