Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Stephen Young & Storm: NFTFi – P2P NFT Lending Protocol: From PFPs & Art to RWA

Episode Date: August 11, 2023

After a 2021 frothy bull market, NFTs are currently experiencing the depression phase of the market cycle. However, despite the fact that only NFT art has truly found its product-market fit, NFTs in general represented the consumerist moment for crypto. In addition, they also provided a solution for tokenising real world assets (RWA) and intangibles, potentially penetrating markets worth hundreds of trillions of dollars. Moreover, similar to digital art, the advent of AI poses a challenge when it comes to establishing provenance, but this represents another utility for NFTs, as they can be traced back to their origin, given the public nature of blockchains.We were joined by Stephen Young and Storm from NFTFi, to discuss the general state of the NFT market, future prospects for NFT development and how their P2P NFT lending platform unlocks new sources of liquidity in this bear market.Topics covered in this episode:Stephen’s & Storm’s backgrounds and what allured them to NFT financeNFT market overviewTokenised real world assets (RWA)NFTFi’s peer-to-peer vs. peer-to-pool modelsHow other DeFi derivatives apply to the NFT marketNFT vs. fungible token market sizeBlur’s BlendNFT royaltiesNFT lending protocols differencesHow escrow contracts affect NFT ownership and utilityNFTFi roadmapInterest rates for different collectionsNFT art marketAI artCollateralizing RWAEpisode links: Stephen Young on TwitterStorm on TwitterNFTFi on TwitterThis episode is hosted by Brian Fabian Crain. Show notes and listening options: epicenter.tv/508

This is Epicenter, Episode 508, with guests Stephen Young and Storm. Welcome to Epicenter, the show which talks about the technologies, projects, and people-driving decentralization at the blockchain revolution. I'm Brian Friene and today I'm speaking with Stephen Young and Storm. Stephen is the CEO and co-founder of NiftyFi and Storm is head of business development. NIFTify is kind of the first NFT lending platform. It's one of the leading and earliest projects in the NIFTFI. finance space. So today we're going to talk about NFTs and NFT finance and NiftyFi and you know sort of like where all those things are going. Pretty excited about this especially because

I'm not very deep in NFT space. So I'm excited to learn more from these too. Yeah. So thanks much for joining us. Thanks so having us Brian. excited to to fill you and your readers and your listeners in on some of the happenings in NFTs, even though we kind of in the depth of a bear market, we are all still pretty bullish on this side. Absolutely. Thanks for having as 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 do you, you know, how has your sort of journey into crypto been and how has it led to am Niftyfy? Yeah, sure. So I'm Stephen. I've been in tech basically since I was a teenager really,

learned a program. My first job was writing a game in C++ when I was still in high school. So really has been in my career from the start. And 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 Rans, purchasing power,

just fall it 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 financial system here. And really, that's how I kind of came across crypto. And then late 2016 bought my first crypto, you know, basically using all, instead of paying into my retirement times,

new idea I was buying crypto, which is probably not the most risk management style for retirement. But really, you know, like given how badly this 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 NIFTIA end of 2019. So basically, spent the first two lockdowns in South Africa, writing the first version of NIFTII, and launched in June 2020. And then my interest in NFTs 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 a LISP 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 art really as soon as I got into programming. So when NFTs came around, you know, combining art, programming, and then I spend most of my career working for financial services companies. So, you know, adding in finance on top of that and you kind of basically have NIFTify. 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. I did that 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 dabbled in it as a student. but at that point in time I was more interested in buying beers than kind of adding to 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 NFTs. So I kind of started in that space, collecting some, trading some, flipping some, the usual kind of classical. NFT degenerate story. 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 in the NFT finance space, but then kind of

since partnered up with a developer, a business partner and 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 quite a while, it is a very, very deep rabbit hole from which you really can't emerge. And probably as we continue on the conversation later today,

like there's a lot of very interesting aspects of the market that are creeping up that 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 nfti market and can you just let us know like what is the state of the nfts market today and maybe also just draw a little but 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 still maybe you can dive into a couple of things that are actually

looking quite interesting going forward. So I think there's broadly two 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 because 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. You know, 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 going to drive value to these assets. You know, they're just pieces of art. They're finished. You know, you can just, everything that you need to know to evaluate them is almost in the past, right? You know the artist, you know their 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, you know, so I would say profile picture projects, PFPs would fit into there.

You know, a lot of the new areas around ticketing and music and royalties and all these kinds of things. they're very interesting and you know 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, NFTs really are a luxury good and the same as any luxury goods, they have,

the wealth effect really takes an impact. So if you look at the prices for secondhand luxury watches like Rolexes and Petec Philippe and you overlay that graph onto the prices for Bored Ape Yard Club, it's almost a mirror of each other. I mean, 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. And it's 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,

a whole day prices for a little bit longer after the rest of the market's actually dropped. Yeah, that's great points. Thanks, Stephen. 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 to three years as an example. Particularly when you look at the profile picture market, which really has actually just been the lion's share of the market to date. It's kind of been a good experiment in NFTs as like a base technological primitive and how you can kind of stack that with other kind of composable technology structures on, that's it, on Ethereum. Like there's been kind of some good, interesting highlights, particularly around the areas of alongside the ones that you mentioned, Stephen, community building,

membership, just general interaction with fans. It's a good way for a company. to release products. So it was 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, 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 to start. seal of green shoots in the area of real world assets. So 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, 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 in the defy money Lego composable worlds that we live in on Ethereum. And I think like, you know, over the coming years, this composability of NFTs with other primitives really starts to form like quite a significant bedrock, you know, an economic bedrock on Ethereum, 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 NFTs. 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 a warehouse and tokenize them. They are fairly unregulated, so you're not having to jump through a lot of regulatory hoops. They kind of act very similar to the actual NFTs. There's a huge overlap in the holder base. So a lot of the people who started collecting NFTs 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 collected. 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 cropping up around NFTs, 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 taken up tokenizer and bring it on chain. So get access to 24-7 markets, you know, open-sea 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 and for the actual physical object, something like that. That's correct.

The official object is stored of some custodian and anyone can go there and basically give the 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 send in the physical asset. They bring it on, take some photos, maybe do a 3D scan, mints and an NFT that represents the assets and then basically that

the actual asset stays in the warehouse and that NFT can start trading and go through OpenC, go into a loan and then at some point if the owner of that NFT was to redeem the asset they can burn that NFT and in return the warehouse sent it back to that person. So in theory

which has got an interesting concept you could become the world's largest watch sneaker, trading card, dealer, without ever taking physical possession of an item, which I think will be quite interesting. And similarly, you can become a major lender in the space without ever having to take custody of an asset. Cool. Well, 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 our listeners will be, you know, reasonably familiar with Defi. and know 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 two 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 the industry are peer-to-peer models. The way that the, I should mention NFTIFI in this case, is a peer-to-peer platform. 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, it's 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 NFTs or various different assets, which they list on the platform. In this case, it's a gas-free transactions are listed on NFTIP. 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 loan to value of assets, around the different APORs, 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 lenders have a shorter time preference where they only want a loan for, let's call it three or seven, sorry, 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 years. So with that being said, at the end of the term of the loan, what the borrower does, they simply, it's a fixed, fixed term loan, APR 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 on which they repay. At that point, they repay the loan, which is initially placed in an escrow

smart contract. The asset, 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 or at 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 peer-to-peer structure. And then so you just do 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 principle 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, okay, 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 repay the loan and then they would they would 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 borrowers actually use the protocol as part of a hedging strategy as well. So essentially to protect their downside in the instance that the value of their NFTs 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 understand the risks for the most part of the structures there. So yeah, it's very interesting space. And then perhaps moving on then to the peer to pool model, which is a little bit different. It probably more closely resembles what you're used to seeing with Ave or or kind of balance or one of these types 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 pools. typically those terms are preset by the pool itself or by the protocol itself. For example, if you add a board ape at floor price of 30 eat and at a 50% alone to value specified on the pool, you can withdraw 15 eat 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 an automated auction mechanism where they're listed and people can bid on them and they're liquidated that way. Whereas in the 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-pool model, you would need that? Yep, that's correct. Absolutely correct. 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 peer-to-pool protocols, is because you have this time-weighted oracle.

So you need to have a time-weighted Oracle. because these assets are pretty illiquid. So, you know, 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-weighted Oracle, which then means big whales in the market, they know where the next price move is coming, and they can essentially position themselves

because they've got, you know, a lot of capital and a lot of these assets to either move the next price that you're going to get from the Oracle around or predict what it's going to be and essentially, you know, down assets into the market just before, just after one of those updates are going to 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, you know, an orthoglyph, 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, or holders is hold them. And in that scenario, you might end up in a peer-to-peer model. Maybe there's a spike down in the price over the short term, but you still want to repay because you believe in six months it's going to recover, and you know that if you sell this asset now, you're not going to 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 circumstances 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, 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 is probably quite illiquid. So it's just a different risk profile and different kind of borrower who will do each one of the two. So 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 that loan and you kind of stop your actual license there. Whereas if you've got a fixed duration loan, you kind of locked in for that period. So you talked, I mean, this is very helpful,

interesting. So you both talked about lending, right? So the use case of lending and then, you know, this pool and P2Po model. Aside from lending, are there other major you know kind of types of if I don't know people trying to do like options or I don't know

is there something like perpetuals or like I don't know 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

there absolutely are and protocols active in that space and the purpose side in particular probably it's a very difficult area. Again, it comes back oftentimes 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, as we're positioning ourselves and have positioned ourselves, as very much a base primitive within the NFT lending world. You do get interesting integrations with these other protocols whereby 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 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 going to integrate alongside us as part of that. So potentially leveraging our smart contracts and settlement layer as part of a major part of 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 the U.R.C20 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 EOC20s, right? So they just way less active. So things like pricing is much more difficult. You know, oracles are much more difficult. So there's just some idiosyncrasies in the actual NFT market, mainly due to, not so much the fact that it's an NFT standard, but the types of assets that are suited to being represented as an NFT, by definition, are more unique.

They're not fungible. They're less liquid. So they just have a different set of properties that, you know, so certain products don't work as well. And there's, you know, new products that are kind of more interesting. 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 or as a borrower,

for example, you could specialize, we mentioned earlier on the podcast, but you could become, a very specialized sneaker lender as an example. And although 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 art lending, for example, in the traditional world, it's like a $1.4 trillion asset class has got a roughly 15% penetration. So 15% of that $1.4 trillion is being held in collateral as a loan, mainly with banks and galleries. And if you're looking at penetration in the NFT space, probably sub 2% at the moment.

It was a little bit higher, I think, at the peak of the bull run, but it's dropped a little bit now. There's a roughly $100 million in outstanding debt across all protocols at the moment for NFT lending. But really, you know, kind of I think of this as similar to where Defi was pre-Defi summer. There was kind of, you know, these protocols, they'd kind of built the core product. they found some product market fit with a core set of users who are very deep into the space and they're kind of dry, you know, 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 going to see that, you know, expand and explode quite significantly because now you're going to 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 market, you know, 56% of the estimated value in the stock market are intangible assets. A lot of them that are non-fundable, 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-fundurable. So buildings, super tankers,

your car is non-fundable. So I think the total addressable market of what's eventually going to be tokenized and represented as non-fundable is as big or even bigger potentially than the EOC20 or the fungible market, but we're still very, very early in that adoption cycle. Yeah. And just even to add

there some additional stats as well, just to give you a sense, Like 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, you know, I can easily see in the next maybe let's call it 220. four years, like half a percent of some of those assets starting to come on chain, because we are speaking to a lot of the protocols behind, you know, that are actually doing this. And, you know, it's happening a lot faster pace than people, I think, realize. One thing I'm curious about, so I was like looking at some of the stats. And I mean, first of all, what was stood out to me was that, like, you know, actually Nifty Fy's stats looked like pretty good. right where okay it's down a bit but not that much right from like the sort of peak uh and then you know there was also like est that for um so yeah i mean there there you felt like well that probably

looks better than most like defy uh 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 like blur coming in like a few months ago and just now having on these charts, at least if it's correct, like something like 90% of the loan volume. I'm curious, can you talk about what happened there? Is that correct? Like, what's going on and what did Blurr 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 so what we're seeing in Blend is if you compare them to, so Blend is the Blur lending offer. that they've got. So if you compare their durations to the peer-to-peer protocols, 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 outstanding debt. 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 the same place. So on the outstanding dead side, they're actually kind of more in line with everybody else, kind of in the 18 to 20 million dollars at the moment. That makes perfect sense.

Yeah, yeah. And I agree with your reasoning. That seems like a more relevant metric or protocol like that. Exactly. And then 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 the incentive structure is set up, taking out a loan as part of your process, if you're trying to maximize the number of points that you 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 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. Are there royalties? Things interesting. Does that does it have some applicability as well in the Niftyfy case? Like let's say in case someone's loan gets liquidated, that then royalties are due for the creator? Yeah, at the moment, there aren't royalties being paid out on a liquidation, just because it's quite difficult to have a standardized,

unchain 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 there is a like a fully on-chain 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 not an easy way for projects to enforce this at the smart contract level.

We've seen a number of projects essentially migrating the EEC 721 contracts to allow them to block marketplaces that bypass the actual royalty payments. So we'll see where that kind of ends up. You know, it's quite a, it's a bit of a, you know, game theory set up there where you kind of asset producers are trying to maximize their royalties while platforms are trying to, you know, maximize volume. So the cheaper, the cost of transaction, the more likely you are to take, to take that volume. I think you probably see, you know, these real world assets platforms, I suspect will probably have a little bit more power to enforce royalties,

because they actually own the fiscal asset, they can just say, well, you can't redeem this asset until you've paid royalties on that actually due. So I think that they've got a stronger moats 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 it's interesting how quickly that seems to have sort of move to the I guess equilibrium or everyone ignores the royalties. Yeah. I think it's an area

that's a big double-edged sword in that for creators, the blockchain offers you and you avenue to access consumers, customers, which, you know, from which 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, can create essentially ways around, you know, giving creators their Jews essentially. So definitely a double-edged sword there. Can you talk a little bit about this, maybe comparing blend and NIFTify 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 you're still

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 a specific user cohort. So typically people who have longer-term views who are collecting these assets because they want to 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 who are like much shorter term deals, trying to maximize yield over, you know, 48 to 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 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 airdrops 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 thing gives you a mint or this other thing. So, you know, you want to be able to use the asset once in escrow.

So typically it's easier to do that. We're in peer-to-peer versus peer-to-pool because assets are all like pulled into a big bucket together. But I think that is the big differentiator right now. And then I think over time, as these

assets become more and more have more of a history people are more willing to land on them over the long run I think features that really drive longer duration are going to become more important over the next six 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 NIFTIFI as collateral does that like how does that work so does it depend on the particular NFTs and yeah so that becomes a little bit more tricky because you start running into this issue where

each NFT has some idiosyncrasicities on how you can use them, what affects their value, all those kind of things. So our solution to that is it should be going live in the next few months. We've got an integration with NOSIS 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 do in the futures, you mint a new NIFTIFE, which is just a NIFTIE safe,

where you, as well as the NIFTIPRICO protocol, are 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 wallet 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 revert to any transaction that does that. Yeah, that sounds like an elegant solution. 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 3 really. And, you know, we don't then need to, you know, as account abstraction gets added on to NOSSA safe and they add additional features, you know, you get all of that for free just by using that as your escrow wallet inside NIF2-5.

And then do you have to also take into account, I think you mentioned it before a little bit, like, oh, what if there are like other things that somebody could do with an NFT that maybe, I don't know. Changes their value. Damage the value.

yeah, something like that. Yeah, I think that that becomes really difficult to handle in a generic way, right? So I think that there's always going to be some, you know, doing these kinds of loans in these segregated escrows, what we're calling it really. You know, for art, 99.9% of the time, it's going to 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

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 write a set of rules that make that acceptable for every single possible asset out there. So do you think that there's always going to be some customization?

You know, one of the big things we are doing as we kind of keep evolving the protocol is finding hooks and places where people might want to inject some custom logic into the process. You know, 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 cost 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 EOC20s because most EOC20s 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 usage inside of another protocol whereas because an NFT can really be anything. It's just a unique digital-ownable thing. It can really be anything. So in some scenarios, it's harder to have very generic pieces of infrastructure built for them. What does the what does the Niti Phi roadmap look like? What's next for you guys to build? Yeah. So what I mentioned earlier, you know, duration, I think becomes really important. So, you know, 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-only loans where at least 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, repay early. there's no safe that we spoke about.

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 watch our orderbook

and make these individual offers. But just expanding that and kind of making it easier for less technical people to compete with what the bot guys can do, making the collection offers more powerful, being able to limit it to specific ranges, you know, 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 and day out dealing with these things.

Maybe he's got a better view there. yeah absolutely um i suppose like as a first concept it's been fascinating to watch even over the last let's call it six 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 um actively deploying capital against um nfts 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 Cryptopunk, and maybe I can go through some of the more major collections that are active on the platform.

Something like a Cryptopunk, 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 Cryptopunks, you could probably look at somewhere in the range of 70 to 80% load to value, maybe a little bit higher on the APR side. Let's call it 10 to 12%. And again, that's 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 chest chip collections. 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 landers like offering the lowest rates for the for the longest terms. And so alongside punks, you also have cromy squiggles by of course the legend that is snowfrow and then autoglyphs as well in early Larva Labs, generative of our project. So they're probably your main three

lowest highest LTV and also lowest APOR collections. And then for other collections, more, let's call it some, you know, other kind of profile pictures that you might classically know. Apes, for example, is going to be a little

bit higher on the APOR 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% APOR 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 art blocks curated

collections, you're probably getting similar rates to the squiggles and autoglyphs, right? Maybe slightly slightly higher or maybe slightly lower LTV just because they're not quite as liquid. But, you know, things like Ferdanzas or ringers, you know, those kind of top tier art projects are also getting rates kind of in that same range. Yeah, that's a great point. There's a very strong bid on the kind of top tier art blocks across the board and 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 you know, Steven, you know, you mentioned in the beginning, right, you were an artist and that you, you know,

did some work around generative art. I'm like wondering also like zooming out a little bit. You know, what's the, 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 know, have two big groups. So it would be the fully on-chain generative art and then more the one-of-one arts where it's not fully generated on-chain. The artist produces some kind of digital image that they then associate with an actual NFTE versus the fully on-chain generative art, which is orderglars art blocks. And 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, you know, there are 512 autoglyphs. you know, there's, 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. You know, still 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 the prices has lowered, it's called it over the last six to nine months,

where you look at the higher end of the ArtBlocks 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 known that there are some ultra-high networks and high networks now starting to dabble 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 asset, 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 30th are very expensive for a new kind of asset that still needs to find exactly where it's deriving 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 first example of a new category in modern art, right? So there's, and then a lot of these ultra-high net worth individuals that Storm was talking about, they aren't necessarily crypto-native. They own traditional artworks, 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, you know, 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 because there's a set of buyers that I just say, okay, 30 grand or 50 grand for a, for a crypto bank is actually cheap. So whenever they drop below that price, it's usually. use D terms, I'll just buy it. And what's the, what is the impact of AI on all of this?

So, AI art as 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 Robbies by Robbie Barrett, a 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, 175th to 300th range 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 just don't, don't get it. I think when you look at pieces of art and it actually has that emotive capacity, you're probably looking at what is quite a powerful piece of art.

So I think 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 art, art history being, you know, blockchain-based art and AI-based art as well.

Yeah, exactly. And I think also the blockchain-based art and AI-based art feed into each other in a way because one of the biggest reasons, you know, generative arts and digital arts has been around for quite a long time. 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 printout 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 because I think it would be AI. 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 going to keep growing because there's going to 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've 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 Anadol 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 of the 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, a generative artwork as you watch it render in, is part of the fascinating engagement that you have with that work. And the same way, you know, the Rafique piece is just, it's utterly captivating and it's taking art, I think, to a whole new level.

Cool. No, I really appreciate it. Maybe just a final question here. So, you know, you talked in the beginning, we talked quite a bit about, you know, different categories of NFTs, real world assets, and you know how it like so broad. When he came to the actual, you know, NFT lending market, is that still kind of all focus 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 Storm said, we're speaking to a lot of people. at the moment. And, you know, what happened in this last ball run is exactly what you'd expect, the fully native crypto assets that are, you know, don't require high transactions through, but, you know, don't require a lot of speed and transaction capacity are the ones that found product market fit, so art, right, and some of these P&Ps. So you're going to seal them taking off, and then you saw all of this infrastructure being built out.

So like we mentioned, perps, lending, you've got indexes, you've got functionalization, 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 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, you know, so we've done some loans on some empty, empty land, you know, there's been some loans on Rolexes, you know, so these things are starting to happen, but there's just quite if, 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 an overlap in how they trade, there's an overlap in how you price them, they're all pretty illiquid.

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 NFTs, 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 the new crop of crypto native NFTs have. 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've got a $50,000 watch, it's actually quite hard to get a loan from a bank on that.

If you've got a $50 million painting, sure, you can do that. So you've got a $10 million super rare watch. Sure, banks will kind of go to the effort of actually giving your loan. But there's a huge amount of value in the $20,000 to $100,000 range that just basically sit there at the moment. So the benefit of actually bringing these things on chain purely as a way to collateralize it really become. quite interesting. I think broadly, you know, alongside the tokenized collectibles there, probably four main categories 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 I think they will start to look quite interesting. A lot of other tokenized financial assets, so bonds and stocks, items like that. And then you 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 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 that was really great overview of like NFT 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 thanks so much for returning us. Yeah, yeah, we're excited. We're in it for the long run. There could be say sometimes where there's value, there's finance, right? So, you know, as the value of things represented by NFTs increases,

the size of the financial ecosystem around, they will just grow in accordance. Thank you for joining us on this week's episode. We release new episodes every week. You can find and subscribe to the show on iTunes, Spotify, YouTube, SoundCloud, or wherever you listen to podcasts. And if you have a Google home or Alexa device, you can tell it to listen to the latest episode of the Epicenter podcast.

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