This is Epicenter Episode 508 with guests Stephen Young and
Storm. Welcome to Epicenter, the show
which talks about technologies, projects, and people driving
decentralization and the blockchain revolution.
I'm Brian Farman Crane and today I'm Speaking of Stephen Young
and Storm. Steven is the CEO and cofounder
of Nifty Fi and Storm is Head of Business Development, Nifty Fi
is kind of the first NFT lending platform.
It's one of the leading and earliest projects in the NFT
finance space. So today we're going to talk
about NFTS and NFC finance and Nifty Fi and sort of like where
all those things are going. Really excited about this,
especially cuz I'm not very deep in NFT space.
So I'm excited to learn more from geeks too.
Yeah. So thanks so much for joining
us. Thanks for having us, Brian.
Excited to for you and your readers and your listeners in on
some of the happenings in NFTS. Even though we're kind of in the
depths of the Bay markets, we're all still pretty bullish on this
side. Absolutely.
Thanks for having us, Brian. Very excited to chat.
Cool. Maybe you can just start off if
you guys could both introduce yourselves and share a bit.
Like how did you, How has your sort of journey into crypto bin
and how has it led to a nifty fi?
Yeah, sure. So my name's Steven.
I've been in tech basically since I was a teenager.
Really learned to program. My first job was writing a.
Game in C++ when I was still in high school, so it really has
been in my career from the start and I I live in South Africa.
I spent two years just as I finished high school living in
the UK and then around 2016 did a calculation and figured out
that I was earning less in dollars 15 years into my career
than I was in my first job living in the UK.
And I was basically because the South African rands purchasing
power, it just fallen off a Cliff.
So I was still in South Africa enjoy the lifestyle, all my
friends were here. But I was looking for a way to
kind of escape the the financial system here and really that's
how I kind of came across crypto and then late 2016 boards at my
first crypto. You know, basically using all
instead of paying in tomorrow times and you would see I was
buying crypto which is probably not.
The most risk like management style for retirement, but really
you know like given how badly the South African Rand was
doing, you really was kind of my only option to really exit the
system here. So that was 2016, went full time
into crypto like 2018 and then started and if to fight end of
2019 so basically spent the 1st. 2 Lockdowns in South Africa
writing The first version of Liftify launched in June 2020.
And then my interest in NF T's really came from the way that I
actually learned to program as a kid was by doing essentially
generative art using this program called Logo.
It's it's a this derivative that's essentially used to teach
children how to program. And you do that by drawing
pictures on the screen with this little turtle.
So I was into generative arts really as soon as I got into
programming. So when NFS came around
combining arts programming and then I spent most of my career
working for national for financial services companies.
So adding in finance on top of that and you kind of basically
have an if to find. Awesome and thanks again.
So my name is Storm, so my background.
I'm originally from Ireland. And so essentially, I kicked off
my career in the investment banking space in a speciality
called project finance, which is essentially infrastructure,
renewable energy. Finance did that for for quite
some time, around five years before I really fell down the
kind of crypto rabbit hole when I discovered, well, I suppose
actually I've been in crypto since 2014.
I doubled in it as a student. But at that point in time I was
more interested in in buying beers than kind of adding to my
my stack of crypto. So I discovered at that time
like really fell in love with it, kind of followed it very
closely over the course of kind of five years.
And at which point I kind of really fell down the rabbit
hole, as I said in 2021, which when I discovered NF T's.
So I kind of started in that space, collecting some, trading
some, flipping some, the usual. Kind of a classical NFT
degenerate story and but I did also kind of begin to discover
NFT finance at that point in time as well.
It was quite interesting that not only could you buy and sell
assets but also you could be into kind of as part of your
trading strategy take loans out against them as well.
So started there as kind of a manual lender and the NFT
finance space, but then kind of since partnered up with the
developer. Business partner developer and
we started doing a lot of automated or programmatic
lending in the NFT space as well.
So really kind of got very deeply involved after a time
came to know all of the essentially all of the major
lenders in the space and quite some of the borrowers in the
space as well. And after you've been in the
space for for quite a while, you you like it is a very, very deep
rabbit hole from which you really can't emerge and probably
as we as we continue on the conversation later today.
Like, there's a lot of very interesting aspects of the
market that are creeping up, but I think are really going to be
exciting over the next couple of years.
Cool. Thanks so much for these intros.
So you mentioned already a little.
You both kind of touched on it a bit, right?
And so this is basically like the NFT market.
And can you just let us know like what is the state of the
NFT market today? And maybe also just roll a
little bit? Yeah, the main things that are
going on. Yeah.
So maybe what I can do is give like a very high level kind of
overview and then store. Maybe you can dive into a couple
of things that are actually looking quite interesting going
forward. So I think there's broadly 2
kind of groups of Nfts that are active in the market and I would
classify them really as. The top end of the art markets
and collectibles and then everything else really and the
top end of the art market. The reason I have put that
differently is cuz I think that's really the sector of the
market that has actually found product market fit.
So these art pieces are they're finished, there's no external
dependencies, A lot of them are fully on chain.
You're not relying on a team or a project to go build something
out that's now gonna drive value to these assets.
They're just pieces of art. They're finished.
You can just. Everything that you need to know
to evaluate them is almost in the past, right?
You know, the artists, you know, the history, the work is either
good or it's not. You're not waiting for any
future things. Then there's this whole second
set of the market, which is. More company like or utility.
So I would say profile picture projects, Pfp's would fit into
there. A lot of the new areas around
ticketing and music and royalties and all these kinds of
things, they're very interesting and a lot of potential there I
think, but much more risky because they still have to prove
product market fits and that's you're seeing it actually in the
prices. If you look at the like an
index, that's mainly made-up of top end art.
They've pretty much bottomed and not really gone down any further
whereas if you look at PFP projects and and all of
everything in that category, they still have quite a lot of
headwinds ahead of them. So yeah so that's like broadly
how I would put those to you. I think the other thing to also
just bear in mind is that you know Nft's really are a luxury
good and the same as any luxury goods they they have the wealth
effect really takes an impact. So if you.
If you look at the prices for second hand luxury watches like
Rolexes and Protect Philips and you overlay that graph onto the
prices for board a Yacht Club, it's almost a mirror of each
other. I mean the the board apes are
slightly more volatile, but you know the peak was in March,
April. They've slowly been going down
since then, starting to bottom right now.
Some signs that maybe the next few months they start turning
around. That is really.
These are illiquid assets that are luxury purchases.
And like every other luxury asset in that class, when people
feel rich, they start spending more money.
When the markets turn around, these illiquid assets are the
last thing you sell. So they tend to hold their
prices for a little bit longer kind of drop after the address
of the markets actually dropped. Yeah, that's great points like
Steven. And I suppose the way that I
would frame it in some ways is that.
The NFT market to date has been a great placeholder for what is
to come probably over the next, call it one, one to three years
as an example. Particularly when you look at
the profile picture markets, which really has actually just
been the lion's share of the market to date.
It's kind of been a good experiment in NF T's as like a
base technological primitive and how you can kind of stack that
with other kind of composable. Technology structures on but sit
on Ethereum like there's been kind of some good interesting
highlights particular in the areas of as alongside the ones
that you mentioned Steven, community building membership
just general interaction with fans.
It's a good way for companies to release products.
So it's a completely new way for them to release products which
you know never discount the concept of companies trying to
sell people at large more products.
It's a. Because you know, it's been an
interesting way for artists in particular to express themselves
that's been a definite bright spot like the emergence of a lot
of creativity on chain, whereas you know artists or creatives
generally might not have had that outlet before.
And then one important area definitely worth mentioning,
we're starting seal of green shoots in the area of real world
assets. So this these are physical or
financial assets which are starting to make the way on
chain. And then just generally as I
mentioned kind of like the concept of digital asset
composability. So which is a really, really
important one where essentially you kind of ask the question
where how do pure digital objects or alternatively digital
objects which represent physical objects, how do they stack you
know in the D5 money, Lego composable worlds that we live
in on, on Ethereum and I think like you know over the coming
years the this. Composability of Nfts with other
primitives really starts to perform like what?
A significant bedrock, You know, an economic bedrock on a serum,
which will be quite interesting. I'm curious if you can dive in a
little bit into, yeah, the sort of real world asset bracket of
the market, what has most traction there, like what kind
of use cases? Yeah.
So I think there's sections of the market that are actually
very similar to the collectibles that I've already found some
traction in, in Nft's. So and that, you know, watches,
sneakers, paintings, basketball, playing cards, those kind of
things. So the reason I think those will
probably take off first is it's relatively easy to store those
things in the warehouse and tokenize them.
That they are fairly unregulated, so you're not
having to to jump through a lot of regulatory hoops.
They can act very similar to the actual Nft's.
There's a huge overlap in the holder base, so a lot of the
people who started collecting Nft's were just collectors at
heart. So they already had a stamp
collection or Magic the Gathering cards under their bed
or multiple watches that they're collecting, so.
So there's just this big overlap between the actual borrower base
or the actual collector base there that I think connects in
quite easily. And then I think the other
reason is now that you're starting to have some of these
NFTE financialization services that are kind of popping up
around Nftes. Tokenizing that asset all of a
sudden means you can do things with it.
That's much more difficult to do if you don't actually take
tokenize it and bring it on chain.
So get access to 24/7 markets, but you know, open CE, blur, all
those kind of things. You get lending markets, you get
fractionalization. You know, there's a whole bunch
of this infrastructure that has been built over the last two
years that all of a sudden actually make it worthwhile to
bring those assets on chain. So in this example, let's say
you mentioned like watches, sneakers and stuff.
So this would you would have an NFT and that can be redeemed
then for the actual physical object, something like that's
correct, yes. And the visual object is stored
with some custodian and anyone can go there and basically give
NFT and they get that. Yes, exactly.
And that's kind of where we're seeing a lot of the traction at
the moment. So there's quite a few people
like 4k.com is basically building a distributed network
of. Warehouses where you you send in
the physical assets, they bring it on, take some photos, maybe
do a 3D scan, mints an NFT that represents the assets and then
basically that NFT can the the actual asset stays in the
warehouse and that NFT can start trading, you know go through
open C, go into the loan and then at some point if you if the
owner of that NFT wants to redeem the asset, they can burn
that NFT. And in return the the warehouse
sent it back to to that person. So in theory, which is quite an
interesting concept, you could become the world's largest watch
sneaker trading cards dealer without ever taking physical
possession of an item, which I think will be quite interesting.
And and similarly you can become you know a major lender in the
space without ever having, having to take custody of an
asset. Cool.
Well, let let's talk about NFT finance then.
So you know you mentioned a bunch of the different types of
assets and of course a lot of listeners will be familiar.
I think most of all is this will be no reasonably familiar with
Defy and you know no kind of the primitives from there.
But what does the NFT finance space look like and what are the
most important, you know, kind of like primitives and
innovations there? Yeah, sure.
So I think there's. 2 main distinctions that you want to
make when you're considering the NFT lending market and that is
whether the protocol is a peer-to-peer model or whether
it's a peer to pool model. I think that's the two kind of
buckets into which most NFT platforms fall at the moment.
And then of course you have structures which sit on top of
them and leverage them. But for the most part, the
building blocks of of the industry are peer-to-peer peer
to pool models. The way that the, I should
mention N FT-5 in this case is a peer, peer-to-peer platform.
It's a, it's a structure that we really back.
It's worked very well for us since the start has really a lot
of excellent aspects about it that make it very borrower
friendly. So just to maybe dive into what
that actually looks like. So peer-to-peer platform as you
can imagine is comprised of two sides.
On one part, you have borrowers which come onto the platform.
On the other side you have lenders which come onto the
platform. The borrowers typically own NF
T's or various different assets which they list on the platform.
In this case it's a gas free transactions are listed on N
FT-5 and then lenders come onto the platform and they compete
essentially compete for the assets which they would like to
lend against. And So what that typically looks
like, lenders set bids structured around loans of value
of assets. Around the different Aprs which
they would like to receive and return for the loan and that's
kind of the typical approach. The borrower will then have a
look through the various different terms that have been
made available to them from the various lenders and they'll
select the terms that work best for them.
You know some, some lenders have a shorter time preference where
they only want to loan for let's call it 3 or so, sorry, some
some borrowers have a shorter time preference where they only
need capital for three or seven days.
Or on the other end of the market, we're actually seeing
quite a lot of loans for 365 days, so full, full years.
So with that being said, at the at the end of the term of the
loan, what the borrower does, they simply it's a fixed fixed
term loan, APO is fixed at the start of the loan.
So at the end of the duration of the loan, they know exactly what
they have to repay and the date on which they repay.
At that point they repay the loan.
Which is initially placed in an escrow smart contract.
The assets I see that the NFT is placed in an escrow smart
contract. It's then released from the
escrow smart contract back to the borrower at the end of the
duration of the repayment of the loan and the lender receives
back their principal plus the interest which they offered.
So that's in summary of the the peer-to-peer structure.
And then so you just still jump in there.
If the lender that the borrower doesn't repay on time, then the
lender can foreclose the asset. The borrower keeps the loan
principal and the lender will receive the actual NFT.
Yeah. So that's basically the risk
that the lender has to sort of calculate with that, OK.
If this NFT drops in value, then all of a sudden it can be the
case that doesn't make economic sense anymore for the borrower
to actually be paid alone. And then they would, it was sort
of default, even if they let's say normally could.
You know, maybe they have the money and they could pay, right?
But like. Correct, correct.
And many, many borrowers actually use and the protocol as
part of a hedging strategy as well.
So essentially to protect their downside in the instance that
the value of their NFNF T's does fall.
And on the other side, you know many of the lenders are very
sophisticated individuals, former traditional finance
individuals and just generally very deep NFT finance people.
So they they understand the risks for the most part of of of
kind of the the the structures there.
So yeah, it's it's very interesting space and then
perhaps moving on then to the pier to pool model which is a
little bit different. It probably more closely
resembles what you're used to seeing with Ave. or kind of
balance or one of these types of of pool models where essentially
on one part you have the borrowers and again you have the
lenders. The lenders place into one
generalized pool an amount of Ethereum or USDC as an example.
And then the borrowers can retrieve Ethereum or USDC from
those pools. By depositing their assets into
the into the pools. Typically those terms are preset
by the pool itself or by the protocol itself.
For example, if you had a award a you know floor process of 30
eats, and I had a 50% loan to value specified on the pool, you
can withdraw 15 eats from the pool.
Typically with that approach there is no duration set, so you
can borrow indefinitely in theory.
However, you do need to be conscious of essentially your
health or LTV ratios in those pools.
So if they fall below a certain level, then there is the risk
that you can have your assets liquidated.
And typically as a result, the liquidated assets are placed
into a an automated auction mechanism where they're listed
and people can bid on them and that they're liquidated that
way. Whereas in the peer peer-to-peer
model, it's the individual lenders themselves which carry
out the liquidations. And just one thing that occurs
to me here, I don't know if that's correct, but it seems
like in the peer-to-peer model maybe you don't need any kind of
external price Oracle, but in the peer to poo model you would
need that. Yep, that's correct, absolutely.
And that's one of the reasons we really back the peer-to-peer
model here, just because we're already seeing it with.
A few of the pier to pool protocols is because you have
this time weights at Oracle. So you need to have the time
weights at Oracle because these assets are pretty illiquid.
So if you're just looking at the immediate price, it's quite easy
to move the floor price of that asset if you own enough of them.
So you have the time weights at Oracle, which then means big
whales in the market can they know when the next price move is
coming and they can essentially position themselves.
Because they've got a lot of capital and a lot of these
assets to either move the next price that you're gonna get from
the article around or predict what it's gonna be and
essentially dump assets into the market just before just after
one of those updates are gonna be.
So I think that is a very key difference between the two, and
I think the other big thing is. Predictability and control for
the asset owners. So you know if you own an auto
glyph for example, you know there's only 512 of them.
They hardly ever sell. They're really hard to get the
hold of once you've actually sold one.
They typically only sell it when the prices are going up, when
the markets are where the prices are going down.
All this is hold them. And in that scenario, you might
end up as a in a peer-to-peer model, maybe there's a there's a
spike down in the price over the short term.
But you still wanna repay because you believe in six
months it's gonna recover. And you know that if you sell
this asset now, you're not gonna be able to buy it back before
the price recovers. And in a peer-to-peer model,
because it's fixed duration, fixed interest, you're always in
control. You always know I need to pay
this much On this date and it's my choice to decide if I do
that. Obviously Excel circumsizes
might mean that you can't, but still, you're in control.
Whereas in these peer to pool models and actually on the blend
model to where it's variable duration, variable interest,
you're exposed to market movements in that actual load
and if there's a temporary price push down, your asset might get
liquidated. Typically these liquidations
happen at the worst time because the market's dumping, it's
probably quite illiquid, so. It's, yeah.
So this is a different risk profile and different kind of
borrower who will do each one of the two.
So that you know variable interest, variable duration is
probably more suitable to a trader who's trying to unlock
some liquidity maybe to chase some yield in another protocol
somewhere. And as soon as that yield isn't
profitable anymore, you can just move the asset out of out of
that loan and you can stop your actual losses there.
Whereas if you got a fixed duration loan, you kind of
locked in for that period. So you talked, I mean that is
very helpful, interesting. So you both talked about
lending, right. So the use case of lending and
then you know this pool and peer-to-peer model, aside from
lending, are there other major, you know, kind of types of DEF I
don't know, are people trying to do like?
Options or, I don't know, Is there something like perpetuals
or like I don't know what are? What other kinds of instruments
have people come up with around NFT?
Yeah, well, you've took the two concepts that you touched on
there. They're absolutely are and
protocols active in that space and the PERP side in particular
probably it's a different, it's a very difficult area.
Again, it comes back often times to the issue of having an Oracle
for what is quite an illiquid asset.
So there's NFT Purp as an example, which is active in that
space and they are in the process of revamping their
protocol to refresh it. But one of the very interesting
areas again is you know as we're positioning ourselves and have
positioned ourselves as you know a very much a base primitive
within the NFT lending world. You do get interesting
integrations with these other protocols whereby you know
they're coming to us to talk to us.
Hey, you guys have the best regarded smart contracts in the
industry, you've been around for the longest and you know we
would love to work with you and build our protocol on top of
you. So as an example, we're actually
in discussions with an NFT options platform who are you
know going to integrate alongside us, you know as part
of that. So potentially leveraging our
smart contracts and settlement layer as part of you know a
major part of their their platform.
But there are a lot of innovations in the space so far.
I think one thing that has many protocols I've struggled with
somewhat is just the level of liquidity in the market.
When you compare it to the fungible token or EU RC20 token
market, they typically tend to work a little bit better from a
composability standpoint compared to NFTS.
But that is something which we're seeing that's shifting.
Yeah, I think that's a very important point.
Even the most liquid NFT collection is probably less
liquid than the least liquid ERC 20s, right.
So they just they just way less active.
So things like pricing is much more difficult.
Oracles are much more difficult. So this is some idiosyncrasies
in the actual NFTE market, mainly due to not to so much the
fact that it's an NFTE standard, but the types of assets that are
suited to being represented as an NFTE by definition, are more
unique. They're not fungible, they're
less liquid. So they just have a different
set of properties that certain products don't work as well and
there's new products that are kind of more interesting and
different and I think quite a bit of opportunity exists in
that as well. In a market that's completely
non fungible, there are areas where you can specialize and
really kind of take advantage of you know from a lender
perspective, lender perspective or as a borrower.
And for example you could specialize we mentioned earlier
on the on the podcast, but you could become you know a very
specialized sneaker lender as an example.
And although you you understand that the liquidity in those
assets from time to time might be a little bit spotty, but you
are still comfortable and confident of taking on that
inventory risk because you're a market specialist in that area?
Yeah, yeah. And can you just talk like a
little bit about sort of the size of the NFT market.
So if you compare you know, NFT with let's say liquid tokens and
I guess there's a whole bunch of different dimensions that one
could look at. You know, I don't know the total
market cap or like trading volume or you know the size of
the lending market and maybe the size of the lending market, you
know. Relative to the total market
cap, I'm curious like what are some of the things that send out
to you the most? Yeah.
So maybe I can talk a little bit about penetration, maybe you can
talk a little bit about more like overall size of the
markets. So if you look at.
Start lending for example in the traditional world it's like $1.4
trillion asset class. It's got a roughly 15%
penetration. So 15% of that $1.4 trillion is
being held in collateral as a loan mainly with banks or and
galleries. And if you're looking at
penetration in the NFT space, probably sub 2% at the moment.
You know it was a little bit higher I think at the peak of
the of the the bull run, but it's it's dropped a little bit
now. There's a roughly $100 million
in outstanding debts across all protocols at the moment for NFT
lending. But really you know kind of I
think of this as similar to where D Phi was pre D Phi
summer. There was kind of you know these
protocols, they kind of built the core product.
They've found some product market fit with a core set of
users who are very deep into the space and they kind of draw, you
know, there's quite a there's. Quite a lot of concentration
around a few big holders, quite a lot of concentration around a
few big lenders. And we predict that in the next
bull cycle you're gonna see that expand and explode quite
significantly because now you're gonna have this infrastructure
and multiple options to cater to different types of users there.
So that's kind of the overall lending market size.
I mean if you can look, if you think about the overall markets,
you know 56% of the estimated value in the stock market are is
intangible assets, a lot of them that are non fungible, right.
So if you're looking at the traditional world and the total
value of all items in the world, most of that value is actually
non fungible. So buildings, super tankers.
Your car is non fungible so. So, so I think the total
addressable market of what's eventually going to be tokenized
and represented as nonfungible is as big or even bigger
potentially than EU SC20 or the the fungible market.
But we still very, very early in that adoption cycle.
Yeah, I'm just even to add there some additional stats as well
just to to give you a sense. If you look at the global
equities market, it's about 120 trillion, global real estate is
320, global debt markets 300. So you know roughly between all
of those if you kind of get you know roughly even at like 2%
penetration there, you begin to actually eclipse the size of the
E or C20 market in and of itself.
And maybe in the near term, 2% is a little bit on the high
side. But now I can easily see in the
next maybe let's call it two to four years, like half a half a
percent of of some of those assets starting to come on
chain. Because we are speaking to a lot
of the protocols behind that are actually actually doing this and
it's happening a lot faster pace than people I think realize.
One thing I'm curious about is I was like looking at some of the
stats. And I mean, first of all, what
stood out to me was that, like, actually nifty files stats look
like pretty good. Right where, OK, it's down a bit
but not that much right from like the sort of peak and then
you know there was also like is that for.
So yeah, I mean there there you felt like well that probably
looks better than most like DEFY charts, right, for like DEFY
protocols. But then when there was also the
thing where you had the like the other lending competitors?
And then you have basically Blur coming in a few months ago and
just now having on these charts at least it's correct, something
like 90% of the loan volume. I'm curious, can you talk about
what happened there? Is that correct?
What's going on and what did Blur do?
Yeah, yeah. So I think important thing to.
For some reason, volume really has been the metric that a lot
of people look at in the NFT lending space, which doesn't
really make any sense, right? And if you're looking at DEFY
lending protocols, you're not looking at daily volume.
What you're actually looking at is TVL, right.
So how much data is collateralized in the protocol?
And that's very much a factor of two things.
It's both your volume and your duration.
And and So what we're seeing in Blend is if you compare them to
so Blend is the blur lending offering that they've got.
So if you compare their durations to the peer-to-peer
protocols, you know so our average duration is almost 40
days. The average duration for a blend
loan is 0.9 days, 0.94 roughly. So they just have to do
significantly more volume to keep the the outstanding debt.
So that's so that's one thing that's kind of, it's very much
skewed. So looking yes they do 90% of
the volume but they need to do 6% of the outstanding debt every
single day just to stay in, in the same place.
So on the outstanding debt side, they actually kind of more in
line with everybody else kind of in the 18 to $20 million at the
moment. That makes perfect sense, yeah?
Yeah, no, and I agree. I agree with your reasoning.
That seems like a more relevant metric for protocol like that.
Exactly. And then I mean the other thing
that's also happening there with blur and blend is that there's
very strong token incentives at the moment that are going on.
And just because of the way the incentive structure is incentive
structure is set up taking out a loan as part of your if you're
trying to maximize the number of points that you did lower points
that you're getting as part of a specific trade.
Taking out a loan on an asset that you bought in a bid and
then selling it out of the loan contract actually gives you
extra points because you get bonus points for taking out a
loan. And selling assets out of the
loan contract means you bypass royalty.
So it's actually the cheapest way to sell an asset.
So you'll see a lot of the blend volume is.
Is really a function of this spot volume.
So the more people are kind of getting assets hits on bids, the
more likely they are to take out a loan.
And it's just part of that kind of optimization loop that people
are using. The royalties things
interesting, does that does it have some applicability as well
in the nifty 5 case? Like let's say in case someone's
loan gets liquidated then royalties are due for the
creator. Yeah.
At the moment the the they aren't royalties being paid out
on a liquidation just because it's quite difficult to have a
standardized Unchained way to know exactly what those
royalties are. So you know our things all get
settled as part of the actual loan smart contract, but you
know, so we're very open to adding those in.
What's there? Is it like a fully Unchained way
to actually determine what the royalties are for a specific
project? And then typically at the end of
a loan, if it's been liquidated, the lender will go to one of the
various marketplaces and sell it there and determine at that
moment in time whether they would like to or not pay the
royalties at that moment. Because paying royalties is
something that sort of like the factor is mostly optional or how
does it work? Pretty much there's there's not
an easy way for protocol for projects to enforce this at the
smart contract level. We've seen a number of projects
essentially migrating their the USC 721 contracts to allow them
to block marketplaces that bypass the actual royalty
payments. So we'll see where that kind of
ends up. It's quite a it's a bit of a
game theory set up there where you kind of.
Asset producers are trying to maximize their royalties while
platforms are trying to maximize volume.
So the cheaper the cost of transactions will like you are
to take that volume. I think you probably see these
real world assets platforms. I suspect we'll probably have a
little bit more. Power to enforce royalties, you
know because because they actually own the physical
assets, you know they can just say well you can't redeem this
asset until you've paid royalties on that actually due.
So. So I think that they've got a
stronger Moat in terms of royalties as being a value
stream for them. And this is another reason I
think a lot of the projects that raised money kind of during the
last. Big bull run.
A lot of them were really relying on royalties to kind of
be their ongoing cash flow and revenue and that's largely
evaporated over the last six months or so.
Yeah, that's interesting. I mean, I guess it was always
something that was kind of like, well, can you really enforce
that, right. And that's interesting how
quickly that seems to have sort of moved to the.
You know, I guess equilibrium of everyone ignores the royalties.
Yeah. But like, I think it's an area
that's a big double edged sword and that for creators, the
blockchain offers you a new Ave. to access consumers, customers
which you know from which you can you can generate revenue.
But on the other side of that, one of the great aspects of
Ethereum in particular is the permissionlessness of it, so
that you can create essentially ways around giving creators
their dues essentially. So definitely a double edged
sword there. Can you talk a little bit about
this the maybe comparing Blend and Nifty 5 or maybe are there
like what are the other kind of NFT lending protocols doing and
what are kind of the main dimensions on which they differ?
Yeah. So I think thinking about
peer-to-peer versus peer to pool, that's a little bit more
on the technical level. If you're looking at it from an
end user perspective. I think the big distinction
there at the moment is, is it fixed duration or variable
duration and fixed interest versus variable interest And
that just, you know, fixed duration, fixed interest is just
much more interesting for us for a specific user cohort.
So it's a big DP people who have.
Longer term views who are collecting these assets because
they want to collect them and they actually want to hold them
over the long run. And then there's a separate
cohort which is much more trader focused to like much shorter
term deals trying to maximize yield over you know 48 to you
know 72 hours something like that.
And those types of asset owners really prefer variable duration,
variable interest because they can come in and out of those
loans in a shorter period of time.
And then you know then I think the other thing which is a
little bit less of an issue right now which was but more of
an issue in the in the past and I think will become an issue
again is can you actually use this asset while it's being used
locked up in an actual loan, right.
So at the peak of the bull run you would have lots of air drops
and events and you know you had to sign into this discord with
your board ape so that you can get access to this other thing
that then gives you mint or this other thing.
So you know you wanted to be able to use the asset once in
escrow. So typically the it's easier to
do that within peer-to-peer versus peer to pool because
assets are like pulled into a big bucket together.
But I think that is the big differentiator right now.
And then and I think over time as these assets become more and
more have more of a history, you know people are more willing to
land over the on them over the long run.
You know, I think features that really drive longer duration are
going to become more important over over the next 6 to 12
months. I'm actually curious to ask
about that, so. Yeah, like using the NFT while
it's being used let's say on nifify as collateral, does that,
like how does that work? It does it depend on the
particular Nft's and yeah, so that becomes a little bit more
tricky because you start running into this issue where each NFT
has some idiosyncrasies on how you allow, how you can use them,
what affects the value, all those kind of things.
But so our solution to that is it should be going on over the
next few months. We've got an integration with
NOSA Safe and what that allows us to do is at the moment what
happens is we have a single escrow contract that all assets
go into. So instead of doing that, what
we will allow users to do in the future is you meant a new
niftify safe, which is just a notice of safe where you as well
as the niftify protocol or signers on that safe.
And then essentially what we do is we block transfer of that
asset during the loan period, so it goes into the safe.
And then the safe in combination with our actual protocol just
says this asset is not transferable.
So it blocks any transfer methods on that asset for the
duration of the loan. As soon as the loan is finished,
that transfer gets unlocked again.
But everything else you can still do.
So you can still use that safe to connect to a Discord.
Using what it's connect. You can connect to any
application that uses that asset and use it as is in the game.
As long as the transaction doesn't result in a change of
ownership of that asset at the end of it, we'll just refer to
any transaction that does that. Yeah, that sounds like an
elegant solution, yeah. Yeah.
It's a little bit more complicated and tricky than just
kind of building a vault that's like protocol specific.
But you know, I think that the right solution there is to plug
into the infrastructure that has proven itself to be the core
part of Web three really. And you know, we don't then need
to, you know as accounts abstraction gets added onto Nosa
safe and they add additional features.
You know you get all of that for free just by using that as your
escrow wallet inside. And and then do you have to also
take into account, I think you mentioned it before a little bit
like, oh, what if they're like other things that somebody could
do with an NFT that maybe, I don't know, changes they value?
Damage the value? Yeah, something like that.
Yeah, I think that that becomes really difficult to handle in a
generic way, right. So.
So I think that there's always gonna be some, you know, doing
these kinds of loans in these like segregated escrow is what
we're calling it. Really for art, 99.9% of the
time it's gonna be fine. For gaming assets, maybe not
right. So I give you a good example of
this is say you've got a crypto Kitty, a crypto Kitty.
A virgin crypto Kitty is more valuable than a crypto Kitty
that's been bred. Now that doesn't change
ownership, but that's purely based on the internal mechanics
of the game and the community, that people value virgin Crypto
kitties more than they do non virgin ones.
Now that's really difficult for any third party platform to go
write a set of rules for that make that acceptable for every
single possible asset out there. So do you think that there's
always gonna be some customization?
One of the big things we are doing as we kind of keep
evolving the protocol is finding hooks and places where people
might wanna inject some custom logic into the process.
So basically being able to say, well, when we lock a crypto
Kitty in this, in the escrow smart contract, there's an extra
set of validation that you need to do to make sure that the
actual transactions can go through.
Obviously there's some gas costs implications there, but I think
over the long run in general this is a problem that you have
much more with NFTS than you do with EOC 20s, because most EOC
20s basically operate in the same way.
You know, they don't have built in logic and built in, you know,
properties that might change as part of the usage inside of
another protocol. Whereas because an NFT can
really be anything, it's just a unique digital ownable thing,
They can really be anything. So in some scenarios it's harder
to have very generic pieces of of infrastructure built for
them. And what does the what does the
Nitify roadmap look like? What's next for you guys to
build? Yeah, So what I mentioned
earlier, duration I think becomes really important.
So different features that really make it easier for both
borrowers and lenders to take more risk over longer duration.
So you know things along that lines are things like
refinancing interest in only loans where at least the the the
lender is getting interest payments during the actual loan
period. You know potentially early
repayment of loans so that you can take out a long loan but you
know you can repay earlier. There's no so safe that we that
we spoke about. So and then a number of
different things that just make it more efficient for lenders to
deploy capital. So at the moment we've got, you
can make offers on individual assets, you can make offers on
like a whole collection. And then we've got API
integrations like Storm said, where you can kind of watch our
order book and make these individual offers.
But just expanding that and kind of making it easier for less
technical people to compete with what the bots guys can do,
making the collection offers more powerful, being able to
limit it to specific ranges, those kind of things.
So where are the interest rate levels at the moment varies a
lot depending on the assets. So Storm spends day in, day out
dealing with these things. Maybe he's got a better view
there. Yeah, absolutely.
I suppose because of first concept, it's been fascinating
to watch even over the last, let's call it 6 to 12 months
rates just continuing to fall across the board.
And that's really a function of there's quite a lot of lenders
who are actively involved in the space and like really actively
deploying capital against NFT loans.
And so as a result, the more lenders, more competition.
It's fantastic for borrowers because they're essentially
competing to undercut each other to secure these loans from
borrowers. So you know where are rates more
specifically? So probably for something like a
crypto punk and maybe I can go through some of the the more
major collections that are active on the platform,
something like a crypto punk. As an example, if you wanted to
get a 30 day loan, you could secure somewhere in the range of
80 to 90% loan to value. At a rate of in the range of
let's call it 8 to 10% APR and actually similarly for one year
duration loans against crypto punks you could probably look at
somewhere in the range of 70 to 80% loan to value maybe a little
bit higher on the APR side, let's call it 10 to 12% and
again that's for for a one year loan.
So probably, you know, alongside punks, there are two other you
know what we term like the really true.
Blue chip collections like we're we're lucky, we have a very
unique lens through which we see the NFT market.
There's like the NFT credit markets.
And so we really get to see like what collections are being
underwritten or underscored as like the true blue chips because
it has the lenders like offering the lowest rates for the for the
longest terms. And so alongside punks, you also
have crummy squiggles. By, of course, the legend that
is Snow fro and then Auto glyphs as well, and early larval labs.
General generative art projects. So they're probably your main
three, lowest, highest LTV and also lowest APR collections and
then for other collections more let's call it you know, other
kind of profile pictures that that you might costically know.
Apes for example is going to be a little bit higher on the on
the APR side, maybe in the range of 15%, maybe looking at
something like a 70% LTV. And then as you migrate across
like the risk spectrum, let's call it, so the lesser known
projects, you probably get up to maybe in the range of 20 to 40%
Apr. And the typical durations there
are around 30 days, so that the classic duration on the platform
is 30 days. I know what actually maybe some
of the best odd blocks curated collections, you're probably
getting similar rates to the squiggles and auto glyphs,
right? Maybe slightly slightly higher,
maybe slightly lower LTV just because they're not quite as
liquid. But you know things like
Fedanzas or ringers, you know those those kind of top tier art
projects also getting rates kind of in that in that same range.
Yeah. That's a great point.
There's a very strong bid on on the kind of top tier art blocks
across the board. I can actually just generally
art blocks more generally too, so the kind of full collections
of art blocks there. Yeah.
Thanks so much. That was very helpful.
This is like a kind of related topic I wanted to talk a little
bit about. So Steven, you mentioned in the
beginning, right, you were an artist and that you needed some
work around generative art. I'm like wondering also zooming
out a little bit. What's the state of the NFT art
market and what do you feel are the most interesting and cool
things happening? Yeah, so I think broadly you
have two big groups. So it would be the fully
Unchained generative arts and then more the one of one arts
where it's is it fully generated on chain, the arts is produces
some kind of digital image that they then associate with an
actual NFTE versus the fully Unchained generative arts which
is orderless art blocks. And you know there's a few other
protocols that are doing that now and these assets essentially
the image itself is not stored on chain.
What's stored on chain is an algorithm that given a specific
hash can regenerate that image at any resolution.
So those are kind of the two broad groups I would say.
In the Unchained art side of things, the generative pieces
are typically part of a collection, so they are 512
autoglyphs. So there's more of those assets.
So they typically have a larger collector base, which makes them
a little bit more liquid. So they trade a little bit more
often. So it's easier to know what the
price is. If you do get a default, it's
easier to sell those items again.
So those are kind of the two broad categories there.
I think both of them have found strong product market fits
store. Maybe you can talk about some
big sales and prices and how they've held up in the recent
market? Yeah, look, exactly so.
I think it's been very interesting as the profile
picture markets across the board has kind of been relatively weak
and and the prices has lowered. It's called over the last six to
nine months where you look at the higher end of the art blocks
market in particular. It's actually remained very,
very solid and stable and in some pockets has increased
significantly. I think when you look at
something like the recent. Goose sale at Sotheby's for $6.2
million, I mean this is a category which is here to stay.
You know it's it's known that there are some ultra high
networks and high networks now starting to double in the market
and build their collection in the generative art space.
So I think it's a category that becomes of increasing interest
to the traditional art world and then as a result, you know.
They're kind of are these well established credit markets which
exist alongside them as well, which actually help to support
the prices of those assets as well.
Because when you are seeking liquidity against the assets
instead of previously your only option was either to sell the
assets, whereas actually now you have two options, you can sell
the asset and or take a loan against it, which is actually a
very typical approach with art collectors in the traditional
art world. Yeah.
And I think another way to think of that a little bit is to say
is to say, you know, profile pictures at 38th are very
expensive for a new kind of asset that still needs to find
like exactly where it's driving its value from.
Whereas you know so there was a recent Autoglyph sale for 200
ether that's very cheap for one of the, well basically the 1st
example of a new category in modern art, right.
So so there's and then a lot of these ultra high net worth
individuals that still was talking about they aren't
necessarily crypto native they own traditional artworks and and
they're buying in dollars. So you know, when these asset
prices for these NFT art assets are dropping in ether terms, at
some point these collectors are looking at them and like well,
in dollar terms, that's actually just really cheap for what I'm
buying here. And that's kind of why I think
you see this floor almost in the dollar price of some of these
assets. And as Ethereum fluctuates, it
just doesn't drop below that specific floor cuz there's a set
of buyers that I just say okay. 30 grand or 50 grand for a for a
crypto park is actually cheap, so whenever they drop the light
below that price of USD terms, I'll just buy that.
And what's the what is the impact of AI on all of this?
So AI art is a category itself, I think is actually quite
fascinating, and it's one that I'm actually very passionate
about. Probably one of my favorite
collections that's out there, if not my favorite.
Are the Lost Robbie's by Robbie Barrett fascinating story behind
them and I mean it's very interesting to see whenever one
of these trades, typically they range in the let's call it 175,
eight to 308th range of of trade prices.
It's very interesting to see a very visceral reaction of people
on Twitter about how. You know, some people just
consider it completely, you know, disgusting or they they
just don't don't get it. And I think when you look at
pieces of art and and it actually has that like emotive
capacity, you're probably looking at it what is quite a
powerful piece of art. So I think as a as a category,
it's fascinating again. In some ways it's similar to
emergence of generative art where you're marrying the medium
of the blockchain with art. I think it's very interesting
here. This is the new Dawn.
If you're marrying a medium of AI, the new emergent category
with art as well. And I think as you transverse
the art history timeline, you know in many years time they
will actually be two seminal moments in in art, art history,
being in a blockchain based art and AI based art as well.
Yeah, exactly. And I think also the the
blockchain based arts and AI based art feed into each other
in a way because one of the biggest reasons, you know, it's
generative arts and digital arts has been around for quite a long
time. They just, they just never
really, it's really hard to actually as a museum or as a
collector to buy them, right. Like what are you actually
buying? You know, are you buying a TV
that's representing these images or you're buying a print out of
that image? But you can print as many as you
want there. And I think if you didn't have
the blockchain, AI art would probably be less interesting cuz
I think it would be AI graphics then as opposed to AI art
because you can't say that this is an original and this is the
one that I'm actually actually selling.
So this is another reason why I think on chain art as a category
is just gonna keep growing, cuz it's gonna be new things you can
do, you know, new technologies come out, but it's now just a
new medium. In the same way that you got
painting and sculpting and performance art, now you've got
on chain art as well. I think when you look as well
like the Rafiq Annadal piece that's in the MoMA in New York
at the moment, I mean, I saw it in person.
It's AI generated. Absolutely fascinating,
absolutely captivating. And you look at the people sat
there for 20-30 minutes at a time, just taking it in, which
just simply doesn't happen with traditional you know, painting
medium for example that existed to date.
So I think, you know we live in this attention economy and these
artworks as an example of generative artwork.
As you watch, watch it render in as part of the the fascinating
engagement that you have with that work.
In the same way, you know, the Rafiq piece is just it's utterly
captivating and it's taking art, I think, to a whole whole new
level. Cool.
No, I really appreciate that. Maybe just a final question
here. So you know you talked in the
beginning we talked quite a bit about you know different
categories and Ft's real world assets and you know how it like
so broad when he came to the actual you know NFT lending
market is, is that still kind of all focused on some of these art
and PFP type things. And hasn't yet reached to, you
know, all these new types of Nfts.
Yeah. So I think there aren't that
many assets yet that are real world assets that are being
represented like like Storm said, we speaking to a lot of
people at the moment and and you know what happened in this last
bull run is exactly what you'd expect, the fully native crypto
assets that are. You know don't require high
transaction throughput, you know don't require a lot of speed and
and transaction capacity are the ones that found product market
fit. So art really right and some of
these peer P's so you're gonna seal them taking off and then
you saw all of this infrastructure being built out.
So you know, like we mentioned perps lending or you've got
indexes, you've got fractionalization, you've got 24
hour marketplaces. So now all of this
infrastructure has been built and a lot of teams saw the
potential there and then started, raised a bunch of money
and now started building out the infrastructure needed to bring
more of these real world assets on chain.
And so we started seeing some loans on these assets, so.
We've done some loans on some empty empty land.
You know, there's been some loans on Rolexes, you know so,
so these things are starting to happen, but there's just quite
a, there's just not that many assets yet that are that have
been pulled on chain as those grow.
You know, the ones that we really see taking off initially
are the ones that we said that are more collectible like.
Because there's a big overlap in the user base.
There's a the overlap in how they trade, there's an overlap
and how you price them. They all eat pretty liquid.
So the characteristics of those assets are quite similar.
I suspect once they come on chain, those assets actually
will be better collateral than most Nft's just because the
thing that's new is how you represent the asset.
But the asset itself has got a much longer trading history than
what? You know the new crop of crypto
native Nft's have so, so you'll much quicker see higher LTV,
lower APR, longer duration loans for these assets.
And I also think that there's quite a lot of collectors who
are sitting on quite a lot of value that they just can't
access at the moment. Because if you got a $50,000
watch, it's actually quite hard to get a loan from a bank on
that. You know, if you got a $50
million painting, sure, you can do that.
So you've got a $10 million super rare watch.
You sure banks will kind of go to the the effort of actually
giving you a loan, but there's a huge amount of value in the, you
know, 20 to $100,000 range that just basically sit there at the
moment. So the the benefit of actually
bringing these things on chain purely as a way to to
collateralize it really becomes quite interesting.
I think broadly, you know alongside the tokenized
collectibles there it's probably 4 main categories of of real
world assets, one of which has mentioned is the tokenized
collectibles. You probably will start to have
tokenized equity and token positions essentially, so from
classic crypto investments. So that that I think that will
start to look quite interesting. A lot of other tokenized
financial assets, so bonds and stocks items like that.
And then you'll lastly also have tokenized real estate and real
assets. But of course the regulatory
friction that comes with all of those items is much more
significant than tokenizing a comic or a trading card or a
watch as an example. So I think those, but with that
being said, once we do get that regulatory unlock, you'd start
to then get like a very material addressable market of real world
assets on chain and accordingly then a material credit market
that sits alongside it. Cool.
Well, thanks so much guys, both for coming on.
I think this is really great overview of like NFC finance and
lending and you know I think it makes a lot of sense, right,
just the enormous thing that's ahead of us.
I'm excited to see how that's going to develop and how these
markets are going to evolve. And so, thanks so much for
joining us. Yeah, Yeah.
We're excited. We're in, you know, we're in it
for the long run. They could be say sometimes is
where there's value, there's finance, right.
So you know as the the value of things represented by Nft's
increases the the size of the the financial ecosystem around
they will just grow in accordance.
Thank you for joining us on this week's episode.
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