Blockchain technology is continually evolving, and the latest trend is the use of Non-Fungible Tokens (NFTs) for lending against physical assets, such as luxury watches. Arcade.xyz, a DeFi protocol for NFT lending, has started facilitating loans that use luxury watches as collateral, with NFTs serving as a guarantee for these loans. In recent weeks, Arcade users have lent three Rolex watches to anonymous lenders for cash, with loan durations ranging from 56 to 90 days.

The process involves a chain of custody that includes third parties and NFTs. Borrowers send their watches to 4K, an on-chain escrow protocol, and receive an NFT representing the watch's ownership. These NFTs are then listed on Arcade, where they wait for the best loan offer. Once a borrower and lender match on Arcade, the NFT is sent to an escrow wallet. The watch can only be retrieved from 4K by burning the NFT. If the loan is repaid, the watch is returned to the borrower; if not, it is handed over to the lender.

The entire loan process can be conducted without either party knowing the other's identity, a feature that Arcade's leadership believes could significantly expand the global pool of potential borrowers and lenders. Arcade's founder and CEO, Gabe Frank, believes borrowers can tap into global liquidity on a permissionless peer-to-peer infrastructure, likely at better rates than a pawn shop.

This new approach to NFT lending, borrowing against physical luxury goods, is a twist on the trend that has already generated over $2.5 billion worth of loans. Typically, users take out loans on high-value NFTs like CryptoPunks and Bored Ape Yacht Club profile pictures. According to a Dune dashboard, Arcade has processed nearly $100 million worth of NFT-based loans to date.

Frank, a former pawnbroker himself, says Arcade has already completed concept loans leveraged against tokenized real estate, debt positions, and apparel. He believes that while we're only at the beginning of utilizing physical goods on-chain, the potential is significant. More than 30 such watches have now been represented via Ethereum NFTs by 4K. To receive a watch back from 4K after a loan has completed, a user will need to burn their watch NFT and provide a shipping address, along with additional identification depending on the level of shipping insurance.