NFT Leasing: How the New NFT Token Standard Opens Up the Next Generation Rental Market
Rentable NFTs have unlocked a new market for NFT usage rights, as they have decoupled from ownership.Author: The Block
Compiled by: Winkrypto
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The Ethereum token standard "ERC-4907" reached "Final" status in late June, unlocking the potential for rent-able NFTs.
Once implemented in smart contracts, rent-able NFTs can drive the development of blockchain-based gaming, metaverse land sales, and more.
In late June, a new Ethereum token standard called "ERC-4907" became a "Final" standard; this standard will allow users to lend out their non-fungible tokens (NFTs).
"ERC-4907" introduces a new role in the NFT standard, separating ownership and usage rights—making "renting" possible. Renters can use the NFT until the rental period expires, and the NFT will automatically return to its owner after the rental period ends.
Before the emergence of "ERC-4907," every time you transferred an NFT, you would lose ownership of it, said Lareina, head of development at Double Protocol (a startup building infrastructure for rent-able NFTs and the developer of the new token standard). But by splitting ownership and usage rights, NFTs under the "ERC-4907" standard can be lent and rented out in a permissionless manner.
It is certain that rent-able NFTs have not been formally available before. Achieving "Final" status means that Ethereum proposals, or projects aimed at improving the Ethereum blockchain, can no longer be updated. Other builders can now incorporate this proposal into smart contracts without worrying about developers changing it later.
Once built into smart contracts, rent-able NFTs have the potential to disrupt blockchain gaming, metaverse land sales, and blockchain-based media platforms.
How to Create Rent-able NFTs
Most well-known NFT projects, such as Bored Ape Yacht Club, CryptoPunks, and Azuki, are minted or wrapped as "ERC-721" token standards, which represent ownership of digital or physical assets that can be verified on the Ethereum blockchain.
These token standards stipulate that NFT owners can use the digital asset. For example, to use the token Axie #5 in the play-to-earn game Axie Infinity, you must have that NFT in your wallet. To have the NFT in your wallet, you must mint that Axie or purchase it on the secondary market.
In other words, purchasing that Axie is the basis for your ability to use it—just like other NFTs minted under the "ERC-721" standard.
NFTs minted under the "ERC-4907" token standard separate ownership and usage rights of the digital asset. The "ERC-4907" token standard can wrap existing NFTs minted under the "ERC-721" or other Ethereum standards, allowing the wrapped NFTs to be read by smart contracts in the rent-able NFT market and be borrowed or rented—just as if they were originally minted under the "ERC-4907" standard.
Additionally, owners can set time parameters to determine how long renters can use their rented NFTs. When the time is up, users can no longer use the NFT, and the rented NFT will return to the original owner—without the owner needing to manually request the return of their asset.
Use Cases and Future Prospects for Rent-able NFTs
Sharing the usage rights of NFTs is not new. Gaming guilds purchase NFTs that are too expensive for most players and lend them out in exchange for a share of the players' profits. Such guilds, like Yield Guild Games (YGG), emerged in late summer and early fall last year when the game's popularity peaked.
"When owners transfer (the rights of their NFTs) to the guild, the risks are significant," Shrug Newton, a builder at Double Protocol, told The Block in an interview. "You have to trust the guild. If the guild disappears, then you lose your asset."
However, "ERC-4907" allows users to manually create guilds using their valuable NFTs, where lenders can charge rental fees while users retain the profits earned from the game. Lareina said they can do this in a trustless and permissionless manner by leveraging Ethereum smart contracts.
While this may seem like a threat to the guild business model, Double Protocol believes that blockchain-based gaming guilds can become market makers for rent-able NFTs—buying and selling securities and often acting as liquidity providers. Established guild organizations like YGG can leverage "ERC-4907" to make their guilds more decentralized.
Lareina added that Double Protocol believes gaming guilds are significant stakeholders in the rent-able NFT market, and they aim to cater to them. This may include creating tools that allow guild organizations to create new guilds with the click of a button and control the distribution of gaming revenue between lenders and renters.
Beyond gaming, rent-able NFTs can also enhance the usage of metaverse land. Lareina pointed out that metaverse landowners can rent out their properties for events. If investors purchase a piece of metaverse land but lack the ability to build on it, they can rent it out to another party for construction and earn rental income. Meanwhile, landowners can protect their assets by removing any other properties they own on the metaverse land during the rental period and re-adding them after the rental period ends.
Lareina added that this technology could also facilitate Web3-based book lending or free trials of new products, as well as other areas.
In summary, rent-able NFTs unlock a new market for NFT usage rights, as they have become decoupled from ownership. Lareina said, "We are building our products on the foundation of this concept."
