How the Pawn Protocol Works

The Pawn Protocol facilitates off-chain negotiation, on-chain settlement for loans collateralized by a wNFT, which is simply a wrapped NFT for ERC20, ERC721, and ERC1155 assets. You can think of the wNFT as a referential asset that the asset holder (borrower) mints, fills, and requests a loan at specific terms on, that lenders can then fill. Alternatively, the borrower can ask for offers from lenders on wNFTs, inverting the matching process flow of control.

Actors in the Pawn Protocol protocol

  1. wNFT Owners
  2. Borrowers
  3. Borrower Note Holders
  4. Lenders
  5. Lender Note Holders

Off-Chain Negotiation

Borrowers and lenders convene on to negotiate terms of loans and settle transactions. A hypothetical example of end to end loan flow up to settlement proceeds as follows:

  1. Borrower wraps NFT(s) in a wNFT on, obtaining a bona fide ERC721 representing those assets in the process.
  2. Borrower creates a loan request to borrow a specific funding ccy (ERC20 token) at a specific duration and interest rate, signing a structured payload transaction for the terms (see EIP-712).
  3. At this point, the loan request is ready to be fulfilled by a lender who can see the unmatched request on in the Lender View and introspect the constituent assets wrapped in the wNFT that the loan request is collateralized by.

Trustless, Secure Escrow

Continuing with the hypothetical loan flow, when a lender is ready to fulfill a loan request they observe on, they can do so via MetaMask, trustlessly at any time as long as the request is still unmatched. The borrower can cancel the request prior to it getting funded and recoup their wNFT. At that point, they can unwrap their wNFT to recoup the encapsulated assets (i.e. NFTs).

When the lender is ready to lend, they simply Lend at These Terms on the loan request in and are prompted to:

  1. Sign the structured payload representing the loan terms (EIP-712 implementation) in MetaMask.
  2. Approve the spending transaction for the funding amount and currency associated with the loan.
  3. Approve the transaction that initializes the loan, disbursing funding proceeds to the borrower address, a borrower note to the borrower (NFT), a lender note to the lender (NFT).
  4. When the transaction to initialize a loan is minted, the wNFT will at that point be "escrowed" in the Pawn Protocol core contract and will only be retrievable under two scenarios: loan payoff or default.