How Does Uncertain NFT Valuation Impact the Required Collateral for a Tokenized Loan?

Uncertainty in NFT valuation forces lending protocols to require a significantly higher collateralization ratio (a lower loan-to-value ratio). Since the true market value is hard to ascertain in real-time, the protocol must maintain a larger safety buffer to protect against a rapid drop in value or a failed liquidation, resulting in less capital efficiency for the borrower.