GameFi has contributed to the surge in popularity of NFTs with expanded functionality and asset utility. From simple avatar jpegs, NFTs are now closer to real-world “goods and services”, as they aid in the creation and operation of virtual communities and digital economies. Besides trading, lending, and staking bluechip NFTs as collateral, you can also leverage NFT value through leasing— the original business model for blockchain gaming guilds. This has quickly made NFT rental platforms an inevitable necessity and separating ownership and NFT usage rights has become critical to creating a risk-free rental experience. However, existing solutions are still lacking robustness in security and the distribution of property rights, making current offerings less effective and less accessible to mainstream users.
By adding clarity and transferability to NFT ownership and usage rights, the ERC-4907 standard has quickly become one of the most important token standards through its innovative and surprisingly simple implementation.
What are NFT rentals?
GameFi currently has an estimated value of $2.8 billion in the ever-growing $200 billion gaming industry. As GameFi continues to develop, NFTs will likely become one of the biggest markets in the digital world. NFT game assets come in many forms, from in-game characters, weapons, and items to virtual real estate in games like The Sandbox or Decentraland.
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 where players can lend their NFTs to each other so anyone can enjoy the game without making a 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.
Why NFT leasing is important
NFTs can have a wide variety of utility, and there are a great many benefits of NFT renting. At the basic most level, the NFT rental industry lowers the barrier to entry for people interested in the asset class. This is important because as NFT industries and communities continue to flourish, there are an increasing number of people ready to embrace the asset class or at least give it a shot.
NFT rentals benefit both owners and renters. For the renter, it opens an opportunity to join the NFT community or take advantage of an NFT’s utility they otherwise wouldn’t be able to afford, even if only for a short period of time. The owner gets to monetize their NFT, earning passive income on an illiquid asset that might otherwise sit unused in their digital wallets, collecting virtual dust. Within the gaming space, these benefits of NFTs rental is clearly a win-win for high net worth gamers and regular players.
The potential for NFT rentals is massive. Digital art, metaverse land, and all sorts of game assets can all be rented. The NFT rental market will thrive with the large-scale adoption of blockchain games, guilds, and metaverse in the coming years. This will result in large amounts of idle NFTs held by users, guilds, and projects. Therefore, it is crucial to support an active rental market to bring down cost to participate and reward existing users’ engagement through rental income.
Lack of liquidity in NFT markets has been a persistent and pervasive problem. Many solutions have been proposed to solve this problem. The NFT maturing and strengthening of the rental industry is one way to improve the liquidity problem— especially for high-value assets.
Current methods of NFT rentals
There are currently two ways by which NFTs can be rented out— collateralized renting and collateral-free renting. In both methods, 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. Additionally, when the rental period expires, the owner has to manually reclaim their asset which is a complicated and expensive process, especially when leasing multiple assets at the same time.
Thanks to the introduction of ERC-4907, the roles of owner and renter are now separated with an expiration date, which means the leaseholder's privileges expire automatically without any further on-chain operations.
The NFT rental marketplace Double Protocol is credited for submitting the rentable NFT standard “EIP-4907,” which passed final review by the Ethereum development team on June 28 and became the 30th ERC standard.
The ERC-4907 standard is an extension of ERC-721 that introduces the dual roles of ‘owner’ and ‘user’ at its application layer. ERC-4907 streamlines NFT rentals through an automated ‘expires’ function which enforces the time-limited role of the user. This innovative feature makes NFTs rentable by default; owners no longer have to manually withdraw user rights, eliminating a tedious process and another on-chain transaction.
ERC-4907 is easily implemented by adding just a few lines of code. Adopting this model as the standard for NFTs may accelerate further innovation and growth of the NFT ecosystem.
Clear Rights Assignment
Coding-in the dual roles ‘owner’ and ‘user’, makes it significantly easier to separate the rights of lenders and borrowers and control what each one can do with their NFTs. It’s also more convenient for the owners to manage their assets and permit another individual to use their NFT for a designated period of time, after which the user loses access to the NFT. This eliminates the risk of renters defaulting on their return. For projects, it is now easier to assign rights to both owners and users of their NFTs.
Simple On-chain Time Management
Once a rental period is over, the user role is reset and the renter loses their access and rights to use the NFT. Previously, this was executed via a second on-chain transaction, but that method is gas-inefficient and imprecise, which can lead to complications. With ERC-4907, there is no need for this extra transaction because the “user” role automatically expires after the predetermined expiration.
ERC-4907 standard can be fully ERC-721 compatible by adding an extension function set. In addition, new functions introduced in this standard share many similarities with the existing functions of ERC-721. This allows developers to quickly and easily adopt the new standard. Existing and future NFTs created as regular ERC-721 can be upgraded to ERC-4907 or wrapped to be as ERC-4907 compatible as well.
Easy Third-party Integration
ERCs facilitate the realization of Ethereum’s cross-platform portfolio. The launch of ERC-4907 will simplify collaboration between all applications under yet another unified standard. ERC-4907 enables smooth integration and reduces the development costs of utility NFT leases in games, metaverse, membership cards, etc., enhancing interactions between all partners adopting the standard.
ERC-4907 also makes it easier for third-party protocols to manage NFT usage rights without permission from the NFT issuer or the NFT application. After a project has adopted the additional user role and expires, any other project can directly interact with these features and implement their own type of transaction. For example, a PFP NFT using this standard can be integrated into a rental platform where users can rent the NFT for 30 days and a mortgage platform at the same time, where users can “rent to own” the NFT through a payment plan. This can all be accomplished without the permission of the original PFP project.
Making NFTs More Accessible
In the traditional NFT rental system, the renter must first provide collateral, usually in stablecoins or ETH. Over-collateralization (OC) is often required, which forces the renter to lock up more capital than the value of the NFT they are renting. This limits who can rent NFTs because of the substantial amount of capital required upfront, especially for pricier NFTs. Renting an ERC-4907 NFT does not require OC nor any collateral at all, as renters are allowed to use the NFT but cannot transfer it nor change its user-ship, which is automatically revoked upon expiration. This opens up more opportunities for users to rent NFTs and make use of them.
Increasing market liquidity
ERC-4907 will greatly expand the development of NFT renting and give rise to derivatives built around it. This type of standard can be applied to various use cases including gaming, art, PFP, music, membership NFTs, etc. As The Metaverse and Web3 continue to expand, more and more people, including those who cannot afford or simply don't want to buy in-game assets or virtual land, will opt for renting NFTs instead to access their benefits. This will greatly increase NFT market liquidity over time.
We are embarking on an exciting journey into the future of NFTs. The digitization of assets is a revolution in how ownership is defined. Through its dual-role functionality, the ERC-4907 standard eliminates the need for collateral in lending and borrowing NFTs. If it is widely adopted as the standard for NFT creation and programming, it will unlock safer and more lucrative possibilities for NFT owners, buyers, marketplaces, artists.
However, there are still some concerns about the completeness of the ERC-4907 protocol and it has not yet been deployed by any projects. We’ll have to wait and see how effective it is and if this innovation can move us closer to decentralized society (desoc) and the democratization of NFTs for the benefit of all.