NFT Lending is Trending

A marketplace called NFTfi, which specialises in loans collateralised by NFTs, has seen a surge in lending volume over the last two months. During the weekend of 3rd July, it hit its highest level with $3.5M worth of non-fungible tokens changing hands. However, we have to look deeper to find the real story.

Richard Chen, a general partner at crypto investment firm 1confirmation, took a look at it and discovered something important. Of that $3.5m, the sum of $3.16M was borrowed by just two whale investors, although there are many on crypto Twitter who doubt that it is two people, and suggest it is a single investor.

The ‘two’ investors borrowed 21,500 DAI against a combined collection of 147 CryptoPunk NFTs. The interest rate on the loan is set by a metaverse-based interest rate protocol called MetaStreet, which acted as sole lender for the loans.

NFTfi specialises in short-term loans, with loans lasting 33 days on average. The interest rate on that period of time is around 4%, which equates to 42% per annum. As might be expected, Bored Apes and CryptoPunks dominate the NFTs offered as collateral.

There is now a rumour floating around that this flurry of activity on NFTfi will launch an airdrop for users. Andrew T of wallet analytics firm Nansen tweeted that NFTfi has been quietly raising funds over the last three months, equivalent to $1m in USDC. He tweeted, “Between that and this possible airdrop farming, could be a token on the horizon.” Others aren’t so sure, with some suggesting there is a pattern at play that looks more like money laundering.

NFT lending is soaring

Whatever the truth of that, NFTfi as a business has been doing extraordinarily well in the NFT lending sector. Since it launched in 2020 it has facilitated 13,402 loans worth $217.6m. It even managed to buck the downward trend of the crypto market in 2022, processing a record $48.7M worth of loans in April, although as market conditions became more strained, volume dropped, with only $15.8M worth of loans being taken out during the month of June.

NFTfi’s excellent results over two years have of course prompted other protocols to enter the market. Arcade, which raised $15M in a Series A funding round in December is one of them and has facilitated $25m worth of loans since it went live in January this year.

Emergence of peer-to-protocol lending

Gmoney, a prolific NFT collector, says that while more protocols are coming along that offer peer-to-peer loans backed by NFTs, the next frontier for NFT lending will be “peer-to-protocol lending.” In a podcast with The Defiant, he said, “At the moment, there’s no peer-to-protocol lending, it’s more peer-to-peer. I think the issue that people are trying to solve is how do you make it a peer-to-protocol lending environment… I know a lot of teams are trying to solve this problem.” Indeed, Messari reviews JPEG’d which offers a token-integrated peer-to-protocol approach, and that because of its utility-driven tokenomics, the demand for the JPEG token is correlated with demand to “maximally utilise the platform.” It will be interesting to observe to what extent peer-to-protocol overtakes peer-to-peer NFT lending, and why.

The Battle Between TradFi and DeFi

Heap of dollar bills eyeglasses and Bitcoin coins. Cryptocurrency analyzing concept

You may have seen numerous articles about decentralized finance (DeFi) and its claims that it will radically change the traditional finance (TradFi) sector. DeFi supporters state that there is a core need for an open, transparent, and secure financial system, and that TradFi simply doesn’t provide that. Essentially, DeFi positions itself as an alternative to the banking system we currently have.

One of the arguments for DeFi is that because it is a blockchain-based concept, it is outside of governmental and regulatory control. This has a strong appeal to those who are concerned about what we have learnt about personal data collection by commercial entities and governments.

DeFi answers the desire for data security and privacy. It also “leverages a set of progressive, agile tools to give control to users,” according to Stably. It also offers features that traditional finance can’t provide, and this makes it an attractive alternative to the current system.

But what are the real differences between DeFi and TradFi? There are three key differences:

  1. In DeFi the public blockchain is the source of trust, whereas in TradFi it is regulatory bodies that are the source of trust.
  2. DeFi is gaining traction because it is open and transparent, and there are fewer barriers to accessing it. The opposite is true of TradFi, especially in terms of the barriers to access, which leaves billions of people unbanked worldwide.
  3. TradFi has its hands tied by regulatory forces, which makes it extremely difficult for its institutions to act with the same agility as DeFi projects.

DeFi’s use cases

There are also three strong use cases for DeFi.

1. Banking

Unlike TradFi, DeFi projects are able to offer banking without borders. TradFi struggles with this, and as mentioned before, this has left billions globally without a banking service. DeFi’s use of blockchain technology overcomes that issue and allows people in developing countries and rmote areas with access to banking via their mobile phone.

2. Circumventing oppressive governments

Oppressive governments are prone to issuing bans and restrictions on financial movement. TradFi can’t offer solutions, but again, because DeFi uses the blockchain and associated tools, it is able to circumvent government restrictions and provide uncensored global financial services.

  • Creative finance

There is a level of creativity in DeFi projects in terms of developing new features and functions. In the past TradFi had a monopoly on financial products, but even those products associated with TradFi can be moved over onto the blockchain, giving DeFi another advantage.

Challenges to overcome

Naturally, while DeFi has advantages, it doesn’t have a clear home run. It also faces challenges.  The biggest one is not hard to identify, and you don’t need to even ask an expert: it is getting the general public to trust the idea of unregulated open-source code. Cryptocurrency doesn’t yet have mass adoption and there is widespread mistrust of it, which bleeds over into the DeFi sector by association. There are fears about hacks amongst other things. Indeed, the DeFi tech is still in its infancy, with much work to be done to make it more trustworthy for a wider audience beyond DeFi fans.

Ultimately, DeFi has a way to go, but it undoubtedly has potential, and certainly as a way to give more people access to banking services. If its works hard on scalability, security and liquidity, it has a real opportunity to replace TradFi.

Big Business is Coming to the Metaverse

A report by McKinsey on ‘Value Creation in the Metaverse’ begins by pointing out that with its potential to generate up to $5 trillion in value by 2030, the metaverse is too big for companies to ignore. To put this in perspective, this is the same size as the world’s third largest economy, which is that of Japan.

In 2022 alone, according to McKinsey, upwards of $120 billion has been invested in metaverse projects, 79% of consumers already using the metaverse have made a purchase, and over 15% of corporate revenue is expected to come from it in the next five years. And looking at the inflow of investment, it’s important to note that in 2021, the investments were only worth $57 billion, which is significantly lower than the first six months of this year.

Interest in the metaverse is also growing, according to the McKinsey report. It says, Google searches for ‘metaverse’ skyrocketed by 7,200 percent in 2021, and Roblox, an online gaming platform, reported over 55 million daily active users in February 2022. Meta has committed $10 billion to its Reality Labs division and

Microsoft is planning a $69 billion acquisition of gaming company Activision Blizzard. As we can see, some of the Big Tech names are already steaming ahead here.

What is driving investors to the metaverse?

The answer is that there are numerous factors that are attracting investors. The advances in the technology needed to run the metaverse is one, a growing demographic of those who are in favour of a metaverse (hello Gen Z), an a rise in consumer-led brand marketing that is attracting users to the earliest versions of the metaverse. This has largely been driven by gaming, as well as the emergence of metaverse apps for socialising, fitness, retail, virtual learning and more.

There is also consumer excitement building around the concept. McKinsey surveyed 3,400 consumers and company executives. The research found that around 60% of consumers using early versions of the metaverse “are excited about transitioning everyday activities to it,” and mentioned connectivity with other people as being one of the biggest drivers of interest. They are also interested in exploring digital worlds.

The sectors where growth is expected

Significantly, 95% of business leaders expect the metaverse to have a positive impact on their industry within a decade, with 61% thinking it will only have a moderate impact McKinsey’s report says the metaverse is the biggest new growth opportunity for several sectors in this decade, namely consumer packaged goods, retail, financial services, technology, manufacturing and healthcare.

Although the growth impact will vary amongst these sectors, McKinsey suggests the market impact on e-commerce by 2030 will be in the range of $2 -2.6 trillion.

Virtual learning is likely to see revenues of $180 billion to $270 billion, while advertising could rake in up to $206 billion. Interestingly, the gaming market, which is where a lot of metaverse action is happening right now, may only see revenues of up to $125 billion.

How to capture the value of the metaverse

The report states that by 2030, more than 50% of live events could be held in the metaverse, and that over 8-% of commerce could feel the impact of consumer behaviour in the metaverse. So, how can business leaders make the most of this new opportunity? McKinsey offers a three-step strategy:

  • Develop a value-focused strategy by defining your goals and the role you want to play that will generate value
  • Test, learn and adapt by launching activities, monitor the results and refine the activity
  • Prepare to scale by aligning talent and tech capabilities and embed them in your business strategy and operating model.

This report makes it clear that the appetite for this virtual world is growing on both the consumer and business sides. Clearly it has much to offer beyond where it is now, but there is a lot of educating to do along the way, of both consumers and businesses.

NFT Creators: Finding Fans and Making Money

“To make a living as a craftsperson, photographer, musician, designer, author, animator, app maker,entrepreneur, or inventor you need only thousands of true fans.” Kevin Kelly

Any artist relies on having fans, and having a large swathe of diehard fans, ready to buy whatever you produce, is a goal most would love to achieve. Back in 2008, Kevin Kelly wrote an essay on how the Internet would make this more achievable for artists in any discipline, simply because it opened up a global audience. However, while creative people waited for fans with spending power to arrive, the online took a slightly different direction to the one they hoped for.

Social media platforms, all of them centralized, was seen as a great way to connect with fans. Throw up a Facebook page, promote your work, and fans would find you. It did work, for a while, but then the SM platforms spotted an opportunity, you could say, a trick they were missing, and
started using algorithms that decided what fans saw, changing the relationship between them and the artists. What’s more, the SM platforms were keeping a lot of the revenue they gleaned for themselves.

The Tide Is Turning

Now that tide is turning and returning to Kelly’s vision, and NFTs have proved to be the vehicles for change. That’s because non-fungible tokens enable artists to sell directly to fans without a third party taking a cut. It’s true that many will continue to use centralized social media platforms for promotion and to connect with fans, but the advent of NFTs
and a crypto=based economy is giving them other options to make money.

But, it’s not that easy to understand what NFTs are. Just ask a person in the street. The chances are that you might find one or two that know what an NFT is, while others might have an idea they are connected to Bitcoin, while others will never have heard of them. Those inside the crypto community might be surprised that a new sector that has such a big
buzz around it, and one where a lot of money is being invested, has had so
little impact on the wider public. But then the same could be said of
cryptocurrencies.

A Better Economic Environment For Artists

However, the lack of public engagement with NFTs is not an insurmountable issue. The NFT craze is in its infancy, which
means it has a way to go to mature, and as it evolves and expands, the size of the audience will grow as well. In this respect, NFTs are still a profitable
venture for creators. After all, NFT sales were valued at $2 billion in the
first quarter of 2021, according to Cloudwards.net.

First, NFTs are created on a blockchain.
This also means that even the owner of an NFT marketplace cannot charge
whatever they want for an NFT, because the artist is in control. Of course, the marketplaces will get a fee, and that creates a competitive environment for the creators who will look for those offering a strong sales performance and lower fees, or other incentives.

Second, NFTs allow for more finely tuned pricing tiers. For example, the hugely popular NBA Top Shots cards can be bought for thousands of dollars, or a few dollars. The same can be seen in CryptoPunks, Bored Apes, and any of the other series.

The third way in which NFTs help artists make more money is in the relationship with the user. Unlike buying say a painting at auction, where the auctioneer takes a fee from both buyer and seller, the person who buys an NFT pays very little to acquire a work. That’s because of the crypto factor! There’s very little marketing spend in the crypto market, and neither Bitcoin nor Ethereum has marketing budgets, yet millions of people own them. The same applies to NFT projects. Chris Dixon points out
that the NBA Top Shots cards, “generated $200M in gross sales within a
month while spending very little on marketing.” That’s because sales are significantly based on peer-to-peer marketing, which in turn is boosted by the community of fans that flock to collectible NFTs, and generate excitement about them. Plus,there is a feeling amongst these fans, who are also owners, that they have skin in the game, and the game has a real buzz.

There are still many ways for creators to build a fan base via NFTs, and boost their finances without the interference of intermediaries. Those platforms that impose distribution and monetization on creators are likely to find that they are challenged. Artists now have more choices, and as Chris Dixon says, when crypto and NFTs offer a new way to make money, that is probably the choice artists will take.