The Cross section of NFTs & DeFi: the financialization of NFTs -Justin Bram, Gabe Frank, Will Price

[Music] foreign [Music] this is Gabe Frank I am and the CEO and co-founder of arcade.xyz we're one of the leading peer-to-peer nft lending platforms we've done about 60 Millions about 65 million in loans against high value nfts and today we have about 12 million in outstanding loans so nfts escrowed into the arcade protocol and we do about 2 million a week about almost about 10 million a month now in loans against high value nft so I'm going to go into detail about kind of the types of collateral how big this Market is the different types of lending protocols and give you a better idea and color of kind of the state of nft lending today um so just a little background on myself that's my punk uh it's currently in it's part of a loan so I'm borrowing uh 45 East uh for six months at nine percent APR against that punk so if you go to our k.xyz you'll see on the app that that loan is an escrow and so basically what I do with this loan is I borrow at nine percent on my punk because punks are the most liquid so they get the lowest APR and then I ARB and I lend back out on the platform to longer tail collections that have higher aprs um I'm also a former pawn broker so before my crypto life I was part of a family business of pawn shops so I used to make loans on non-fungible physical assets diamonds watches paintings purses kind of anything that didn't eat that's what my dad liked to say um and I also worked at a couple institutional crypto custodians so Bitcoin curve where I did uh crypto lending on an Institutional scale so we used to borrow from the depositors into the custodian and then lend out to market makers OTC desks um kind of like a bank lending out deposits and sharing the spread back to the depositors foreign so just to give you some color on on the size of this market today uh in 2022 there was a total of 500 million in in loans against nfts and that's a tenfold increase from the previous year so in 2021 there were only 50 million of loans against nfts uh and the year before that there was probably zero so you can kind of see the rapidly growing even though there's a very Niche and small market right now it's a rapidly going space hmm and this is uh just uh uh doing dashboard it's a weekly volume chart of all the different leading protocol nft Finance right now uh so it's Nifty Phi it's Bend out it's x2y2 it's us arcade uh JPEG and Pine and right now the nft lending space is doing about 25 million to 30 million a week in loan originations against nfts and then um so going into the different types of lending protocols uh we have peer-to-pool um which is basically you have a bar that has an nft they can deposit that nft into the pool and take liquidity against it so it's a resting pool of liquidity and that's why it's peer to pull and there's differences between peer-to-pool and peer-to-peer there's advantages and disadvantages on both sides um but peer-to-peer is a little different you're matched with one counterparty it's it's one bar to one lender there's no resting pool of that you can take from um so this thing turn off yep uh so yeah I'll go into differences on the two protocols but um just so you have an idea the leading protocols uh today are the logos you see on this screen so it's nifty-fi arcade bendao x2y2 and JPEG and between these protocols we're doing about 25 million a week in loan originations um so some of the main differences of the two types of lending protocols uh so peer-to-pool is more like your Ave compound experience uh you borrow against a pool of liquidity where the lenders basically they Deposit they share the same type of risk profile um and basically with peer-to-pool uh nft lending protocols they treat assets as as fungible so basically with employers usually an oracle like a chain link Oracle that uh um that that basically uh gives floor prices on chain and so that's where these uh that's how pricing is determined on on here to pull protocols um yeah so some of the other benefits of peer-to-peer or it's instant liquidity for borrowers and that's why you've seen protocols like peer-to-pool and the fungible token space like all van compound really take off because of the flexibility they're like open term loans that you can pay off at any time there are liquidation mechanics so you can get liquidated and appear to pull lending protocol um it's also limited to collection support uh because it's based off floor pricing there's no unique pricing on each nft it's just they basically treat it like fungible assets um and then also its variable rate so when you're depositing into Ave or compound somewhere to one of the peer-to-pull nft lending platforms it's not working here you go hello hello okay I think that's a little bit better um and so now getting into peer-to-peer what which are K dot XYZ is peer-to-peer it's one to one so a bar matches with one lender there's no pool of liquidity that the borrow is taking liquidity from they meet on the DAP uh they do on-chain negotiation or off chain negotiation and then really use the DAP to Escrow and settle the collateral and Loan um so peer-to-peer lenders have different risk profiles there's lenders uh for every sort of collection out there some lenders are bullish on punks some are bullish on basis some are bullish on gen art so it just kind of depends so we have a bigger lender base of different risk profiles um also can support any collection and that's why you'll see in addition to pfps you'll see R you'll see one of one gen art uh Financial NFP nfts um like unit swap LP positions uh and uh any other thing that's unique on chain and the loans are fixed term so like my punk loan that I got 45 each loan for six months uh it's fixed term if I don't come back to pick up that loan in six months then the lender has the claim to my collateral and they can claim that asset and then do what they want with it um and that's why usually lenders and peer-to-peer are bullish the collateral anyways because if the bar doesn't come back to pick up the asset they can claim the asset and and sell to recoup their profit um so going further into the different types of lending um nft collateral so these are our main types of collateral that we see on the platform today um right now the nft market cap is probably at about 10 15 billion and 70 percent of that is made up of pfps so the majority of the assets on our platform that are used as collateral are from pfps but we do we are starting to see other types of assets as well like on the art side so we see 101 art loans uh we see Financial positions like you to swap LP positions uh in-game assets like wolf game or other assets that you can use on chain uh and then getting into real world assets as well so we've done a loan on an actual uh Rolex that was tokenized as an nft and that nft was used as collateral on our platform and then just to give you an idea of the volume of these and which is kind of the top collateral in these lending protocols so crypto punks obviously are the most liquid nfcues today they're also probably the most in demand um maybe the most stable priced use of volatility on punks is somewhat low right now and so that's why lenders are most comfortable lending against crypto punks today uh and then you go down the stack you have board Apes you have mutin Apes you have azuki art blocks clonex and those are kind of the top uh nfts today being used for collateral uh these are a couple cool loans that I mean you can't really see this is a some images of our of our dap but this is uh some big loans that we did on our platform for a Golden Ape so the ape loan um this golden a owner borrowed 370 ethereum for 30 days at 19 APR um so the holder of this asset is probably barring for a couple reasons it could be for leverage so just Levering up um it could be a downside hedge of the you know if he thinks the the NFC price is going to tank uh a few months from now so he has basically um he's locked in at 378th he doesn't have to pay back the loan so it's kind of like a downside hedge um and also which is capital efficiency so like these type of loans that are higher value it's more like the Trad art world where 100 million dollar picassos and monets Bank of America lends against those and they get collateralized and reappraised every year and the price goes up and that's that's just kind of finance and how it works um so the the one on the on the right side is uh two Mega mutants that was used for a thousand each loan uh for 30 days and so those those assets are sitting in our protocol asteroid in our protocol today uh some more cooldowns this is more on the art side so on the art side we're seeing artists like fioshas and x copy artists that have gone through Christies and Sotheby's and have have worked sold at those major auction houses um so there are lenders that are getting comfortable lending against these 101 nfts now um usually these lenders can always find a bid if the bar defaults lender has a basically a backstop bid uh to protect themselves and hedge themselves um so these are just some examples of the loan this fueloshes on the left got a loan for a hundred thousand usdc at 20 APR for 30 days uh in the middle is an x copy 101 that was 160th principle and on the right is another x copy 101 for 150 eighth principle um and then going further so we talked about financial nfts like uniswap LP positions um we've done loans on a protocol called uh I think it's liquify or liquidy and they have this this concept or nft called chicken bongs this basically represents uh financial position on their protocol and so borrowers have used those assets as collateral for loans uh on Arcade um we've also done that Rolex so that's what that Rolex looks like it's a Daytona uh so if the bar defaults on that loan the lender has a claim to the physical Rolex um and that's how that works this here on the uh on the left on the bottom is actually a piece of land that was tokenized by a company called Fabrica and then that land in Ft was used as collateral uh on Arcade and that's kind of a proof of concept but you can see the the types of value coming on chain and the types of collateral that can that's going to be used going forward uh so why D5 why is this all built on D5 um I think it's pretty simple I think that uh with the FDX collapse and centralized lending collapse of uh like opaque terms and and backroom deals and Rehab authentication of collateral there's a real need for on-chain finance and then the reasons are because it eliminates counterparty risk of course there's protocol risk but it eliminates counterparty risk you have proof of settlement so basically on chain um governs the entire life cycle of the loan and the collateral so we cannot touch as as as Builders of the protocol we don't have access to any of the collateral that's sitting in our protocol it's all governed by the smart contracts and the code that we built um it's also non-custodial Finance so you can connect your own wallet and it's permissionless you just need a metamask you connect to the DAP and you can be a lender or you can be a borrower and the rules cannot be changed the you know the contracts are immutable so there's proof of settlement and these assets are digitally native and they're on chain so it makes sense for sort of nft Finance being built um D5 first and that's it any uh any questions so for the settlement of the Rolex and how the physical item how is that uh play out if there was a you know the holding the Rolex is essentially yeah so there's a company called 4k.com uh who we worked with on this one and basically uh an owner of a Rolex can send them the physical Rolex they meant the nft keep custody of the of the Rolex and then they use the nfts Clutter on the on the app is it same with the land essentially uh for the title of the same concept with with any sort of physical asset yeah just a two-bot question um to borrowers and a lenders agree on a liquidation threshold and where does your pricing data come from is it related floor pricing or on chain or yeah good question so there's no liquidation mechanics on our platform it's peer-to-peer so the loan if the bar doesn't pay back on the due date the loan goes into default and at that point the lender has a loan note that's a claim to the collateral and escrow and so they can they can claim the collateral um what was the second part of that question second part was uh where you get your pricing data from yeah so we aren't the lenders ourselves or just the marketplace so we provide valuations through other protocols like nft Bank um but uh basically lenders who come to the platform they have their own idea of valuations they have they use their own metrics uh but we do try and provide that data to get the valuation piece yeah how do you take care of the security of your smart contracts let's say there was another question about liquidation let's say you know some something unexpected happens the borrower is not the lender is uh provided provided NFC and the borrower and someone who wants to hack this Arrangement so let's say like if a person needs to part with their nft how how strong how secure your contracts are and you're asking about the security of the smart contract exactly like for instance if someone is about to lose a very valuable nft uh through the not meeting the loan requirements like and how safe your contract is that they will not be able to hack it yeah so our uh our protocol team is sitting right here and they can answer all the technical hard questions like that but basically we've gone through several audits of of the code and smart contracts uh the contracts are battle tested so we've done about 60 million of loans um and uh we're very focused on on security a lot of our Engineers have come from custodians in the space and a lot of focus on security yeah uh it would be cool to share about a rolling over your loan yeah for sure so uh we have this concept of loan extensions uh on Arcade so if somebody gets a 30-day loan uh basically at the end of 30 days they have to pay off right but on Arcade we allow lenders to make a bid for an extension so if I have a hundred each loan and it's coming due in a day uh somebody can make a lender another lender doesn't have to be the original lender can make a bid on my loan so that I can extend and I just pay the interest and so that's what about half the loans on our platform are doing they they extend every month uh or every term uh so we've chronic created this competitive bid market for extensions that really drives down aprs and rates for our borrowers which is kind of unique for mother lending protocols what are your uh what do your default rates look like yeah so surprisingly our default rate is around five percent and how does that compare to like traditional loans the traditional like a more traditional Loan in traditional Finance I mean like payday loan lenders if you want to compare that is like 30 defaults um five percent's I think pretty low especially for these nfts uh in a new in a new market and that's I think because we allow users to extend loans um and that's why we don't see too many defaults yet two questions connected kind of persons how do you set up the interest rates for the loans and the second may be related is how do you entice people to stick with your platform and how you are different from the other end of The Lending platforms thanks yeah so I mean how we're different from the other learning protocols um we all eat have a road design like our uh the way we've designed our protocols is unique to others have designed their protocol um worse peer-to-peer it's a pretty simple concept peer-to-peer if you don't pay back the loan lender can claim um but I think what makes us unique is some of our smaller features that allow uh bars to extend loans um our team is very uh active in the space as well we're all on Discord if there's ever an issue we onboard people very easily we have a BD team uh so we're at D5 protocol but we sort of have a pretty big human element to what we do um yeah and can you repeat your other questions I'm sorry the the interest rates in my mind it will be obviously important for those who place the collateral on your platform is one of the retention points for them so how do you set up your rates yeah so the rates are determined by the lender and borrower so we sort of we are just the more we provide the marketplace and the rates are determined by like the history on the platform lenders already know it rates the land like the LTV the duration The Raid and then they they give that to the borrower and the borrower can decide if they want to accept those terms so sometimes that negotiation happens off chain sometimes it happens on chain via sign messages cool thank you all very much [Music]