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Look At My JPEG — Ep. 24 Recap — Drops

Welcome to another summary of our recent conversations with NFT Finance teams, where we delve into their projects, market views, future plans, and much more. This time, we had the pleasure of speaking with Darius, the founder of Drops, a peer-to-pool NFT-backed lending protocol that allows NFT holders to get instant loans against their NFTs.
Introducing Darius
Darius’ journey into the crypto world began in 2012 when he was intrigued by Bitcoin and its possibilities. He delved deeper into blockchain development during the ICO bubble in 2017, running a development agency that focused on token projects. Around 2020, amidst DeFi summer, Darius recognized the untapped potential of NFTs. His first steps in the NFT space were with Node Runners, which gave him insights into the limitations of the current system and the need for a mechanism where NFTs could be productive assets, similar to DeFi tokens. It was this realization that led to the inception of Drops, a liquidity protocol designed to make NFTs instantly accessible and usable as collateral, thereby unlocking new and exciting use cases.
About the Protocol
When Drops began its journey, the landscape for NFT liquidity was fairly uncharted. While there were attempts to fractionalize NFTs for improving liquidity, the landscape saw a dramatic transformation around mid-2021 with a surge in NFT trading volumes. This surge made NFTs more liquid, leading Drops to shift its model to base NFT prices on floor value, enabling borrowers to borrow up to 60% of their NFTs’ value.
A crucial part of Drops’ design is its pioneering Oracle model, which aims to determine a fair value for NFTs, enabling quick liquidations should a loan go underwater. To achieve this, they viewed the NFT market like an order book, considering bids and asks to determine a median price. Their methodology involves tracking all sales and utilizing statistical probabilities to filter outlier sales. By applying this method, they could confidently predict that an NFT could be liquidated when placed on the market.
To create a reliable oracle, they experimented with various models for several months. Finally, they settled on parameters based on standard deviations, likening the approach to Bollinger Bands in trading. If a sale occurred outside of this band, it would not count, ensuring a level of certainty in the oracle’s efficacy. Additionally, the oracle includes time-weighted 24-hour floor prices and combines these values to produce a blend of the average floor price and spot price.
Another crucial element of the oracle is the liquidation mechanism. Instead of using auctions, which can prolong the liquidation period, Drops facilitates instant liquidations, similar to other DeFi protocols. This instant liquidation model protects LPs, as a rapid decrease in the value of the NFT may result in the under-collateralization of the loan. In case of liquidation, the collateral can be purchased at a discount, which then pays off the loan, leaving the user with any remaining balance. The discount on the liquidated NFT is determined based on its liquidity on the market and the spread between the bids and asks. This is in addition to any royalties due. This model of discount incentivizes arbitrage liquidation, which offers more protection to LPs and permits higher loan-to-value (LTV) ratios for borrowers.
Lending and Borrowing
Lenders on Drops have the option to deposit their capital into different tranches of pools. These pools have varying parameters depending on the risk and volatility associated with the NFTs they accept. For instance, the blue-chip pool has a higher total value locked (TVL) and lower interest rates due to the stability of the NFTs it accepts. Conversely, pools that accept lower liquidity NFTs offer higher interest rates and, consequently, higher risk for lenders.
For borrowers, interest rates depend on the pool from which they’re borrowing. Drops offer a “pay as you go” repayment system, where borrowers can repay the loan at any time, and interest accrues every second. This system also enables LPs to earn their interest continually.
SweepMax future or Drops model of “Buy now, pay later”
SweepMax is essentially a tool for optimizing the acquisition of NFTs. SweepMax operates similarly to an aggregator, such as Gem or OpenSea Pro, allowing users to “sweep the floor” of NFT collections. However, SweepMax integrates a unique lending mechanism where a percentage (about 30–40%) of the cost of the NFTs is financed by a lending pool. This financing action is collateralized by the acquired NFTs, resulting in a loan position on Drops. Essentially, users can own NFTs without having to pay the full price upfront, akin to a “buy now, pay later” strategy.
This model is designed for users to make payments on their schedule until the NFTs can be withdrawn. Currently, SweepMax only supports specific collections that are approved as collateral on Drops, although there are plans to expand this in the future. In its present state, SweepMax is primarily for purchasing floor items in a collection, but there is a planned feature that will add pricing for specific traits within collections, enabling purchases of more valuable items.
Plans for the Future of Drops
Drops are developing features such as NFT staking, which would allow any NFT supported on Drops to earn ETH passively. This is achieved by taking a loan against the staked NFT and sending the borrowed ETH to a vault that produces yield, which is then returned to the NFT staker. Additionally, Drops is planning to extend its support to collections on the Polygon network.
Big thank you to Darius for joining us and having a thrilling discussion! Follow him on Twitter: https://twitter.com/0xdarius
Listen to the full podcast episode with the following links: https://podcasters.spotify.com/pod/show/lookatmyjpeg/episodes/Episode-24---A-Conversation-with-DropsDAO-Instant-NFT-Loans-e242jg7
Twitter Spaces Recording (limited time only!): https://twitter.com/nftperp/status/1646890984029007872
Drops
Website: https://drops.co/
Twitter: https://twitter.com/dropsnft
Discord: https://discord.com/invite/GJXEBHQbzQ
Docs: https://docs.drops.co/dropsdao/introduction
nftperp
Website: https://nftperp.xyz/
Twitter: https://twitter.com/nftperp
Discord: https://discord.com/invite/nftperp
Docs: https://nftperp.notion.site/nftperp-xyz-2b456a853321481bac47e5a1a6bbfd4e
Look At My JPEG on Spotify: https://podcasters.spotify.com/pod/show/lookatmyjpeg/
