The potential NFT loan market, accessing liquidity through digital assets – SlateCast 51

SlateCast 51 began with a conversation regarding developments in the crypto world and the impact of downturns on the industry. Host Akiba and guest Justin Bram of Astaria discuss a new project called Astaria which aims to unlock instant liquidity for every on-chain asset.

Astaria will launch an NFT lending marketplace where people can borrow against the value of their NFTs. The conversation also touches on the issues faced by the crypto industry, such as the FTX scandal and the negative impact it had on the industry. Justin also gives an overview of his work with Astaria and their goal to reach their long-term mission of unlocking instant liquidity for every on-chain asset.

Justin believes that in the short term, the NFT loan market is still small, with only a few hundred thousand dollars worth of loans originating each day. However, he believes that as technology advances and more real-world assets are tokenized, the market could grow significantly.

He also mentions that companies specializing in the custody and delivery of real-world assets, such as watches and classic cars, are likely to be some of the first to bring their assets on-chain for better price discovery and liquidity. Justin sees a lot of potential for this market to grow and for new innovations to help solve the problems of custody and delivery of real-world assets.

To discover more, watch the full podcast available above on YouTube.

Full Transcript

Akiba

Hey, guys. Akiba. We’re back for the next episode of the SlateCast. It’s a really interesting is probably a nice way of putting it in terms of interesting time at the moment in crypto, and we’re going to take a little bit of a break from that. So if you’re kind of tired of looking at the charts right now, this podcast, we will touch on what’s going on at the moment. We’re going to talk about a new protocol and a new project that’s coming out, so stick with us. This is going to be hopefully nice and cathartic for everyone, so stick with us. Going to run the intro and we’ll be right back. Okay, let’s get going. Justin from Astaria, how are you doing, my friend? How is I mean, I just said that we’re going to try and make this a cathartic episode, but I mean, it may be a bit of a light. It’s going to be hard not to talk about what’s going on at the moment. How are you finding things at the moment? We can treat it like a little bit of a support group for people out there. How are you feeling at the moment? What are you doing to sort of cope with the downturns and sort of I imagine you’ve been in this space for a while, so it’s not really too new to you.

Justin

Yeah, well, it’s definitely surprising, that’s for sure. So I’m certainly shocked. Fortunately, I don’t really know anyone that was really affected personally from the situation, so I’m based in the US. So most of the folks I know are in the US. And obviously most US people did not have access to the.com version of FTX, just the FTX US. Version, which I don’t really think anyone used too much. So, yeah, it’s certainly a shame for folks that didn’t have their funds trapped in. Was really sad to see that some people just sort of, like, held on to the end and stayed in FTX, but it’s a tough time for the industry, I think. It’s really, really the price is going to do its thing and I’m sure there’s some downward pressure ahead. I’m less concerned about that and more just that Sam was so in bed with politicians, regulators. From what I read, he was the second largest donor to Democrat, so people really knew this person. And I think with the split congress that we’re likely going to see based in the election in the US, like regulation is less likely in the next few years. But I think this just sort of pushes us back because it’s certainly not a good look that the one person that was supposed to be responsible and do the right thing was really just gambling with user funds is what it appears like. I mean, we don’t have the full details, but it looks like there was about a $6 billion hole in the FTX balance sheet that money had to go somewhere and right now it’s presumed that they were basically just gambling with user funds, which is terrible.

Akiba

Yeah, it’s difficult. We tried to do a deep dive into sort of any known st yet wallets, Alameda wallets related to DFI because obviously during the kind of the May crash spot from the whole Terra Luna thing and then like the three AC aspect of it. The beauty of crypto is that a lot of it’s on chicken and a lot of it’s transparent. I think what’s kind of interesting with this one for me is that I think a lot of people have been looking towards SBF as maybe being one of the villains of crypto. There was people on both sides of the fence, but I think few people saw it to be a liquidity crunch that was coming that way. Maybe some dodgy deals, maybe some manipulation of price of other projects are things that have been kind of rumors in the air. But the fact that they were just lost of funds I mean, I wrote a piece yesterday, the Unchained data was suggesting their Bitcoin balance was actually negative. It couldn’t have been, but it shows that they were actually in Bitcoin. They had less on the exchange than they actually owed to customers. That’s not where we want to be. But aside from that, I am completely with you. And every conference I’ve been to, every person I’ve spoke to, everyone working in the industry doesn’t really care about the price, it’s about building, it’s about the growth of the infrastructure. So with that, what are you working on at the moment with Astaria? And just give us a little bit of a background on the projects and what we can expect coming forward.

Justin

Yeah, sure, it’s a pretty big transition there, but yeah, we’re building a project called Astaria. And so our company mission here is effectively to unlock instant liquidity for every on chain asset. So to start, we’re launching to reach that goal eventually that’s more of a five to ten year goal, but to reach that goal in the near term, we’ll be launching an NFT lending marketplace. Meaning that people can borrow against the value of their NFTs. And today that generally means like probably one of the most common use cases is borrowing against NFTs in the traditional sense, like what you would think of when you think of a board, a punk, et cetera, et cetera. But we’ll be supporting any NFT. So another great example is like a uniswall V three position. As far as I know, there’s really no way to borrow against a unit V Three position. Maybe there’s some tool to leverage up on them on Maker, but we’ll be allowing users to borrow against that. And so we have a pretty different approach than some of the existing platforms like NFT Fi or Nifty Fi, Bendau, JPEG, there’s several out there. We have a very different approach and yeah, happy to get into that more. But that’s just a quick high level explainer.

Akiba

Yeah, I’m just wary of just going through the whole issue because I think we could easily talk for an hour on the current state of of crypto and what kind of sam’s done and whether finance are really going to go through it and stuff and this stuff. But I say I’m interested in what’s being built. Like ultimately price is going to go up and down over the next 18 months, two years, three years. I’m still massively bullish on this industry and that’s kind of irrespective of price. You mentioned bend out there. I remember when there was a bit of a crash a few and a month ago, there was a lot of attention being brought to their platform around some of the floor prices of apes and people running into trouble kind of losing their apes by being liquidated. And this such you say you’ve got a different approach. How do you differ from some of the other sites that I mean similar things.

Justin

Yeah, sure. So right now there’s basically more or less two different approaches that are pretty popular. I’ll just explain both of them and then I’ll talk about what we’re doing. So the first would be Bend out, which you sort of already alluded to and what Bendau does. And this approach has not a lot of traction because it’s simple and allows you to get instant liquidity. They basically treat every asset in a given collection as the same, more or less. So they’re basically going to auto liquidate you based on the fluctuation of the floor price. And it doesn’t matter what piece in that collection you have, you’re still borrowing the same amount against your piece. And you’re always going to get liquidated whether you have like a rare bordate or crypto punk or whatever it is, or a copied one. So again, the benefits here, instant liquidity, like very hard to issue bad debt because we’re instantly liquidating. And it’s just easier, right. Like you don’t need sophisticated actors to come in and price these assets. So that’s one side of the spectrum. Of course. The downside is like, you’re treating every piece the same there. So it’s sort of like defeating the purpose of NFTs in general. And that’s like pushing us more towards, I think what Kobe said once of like, currently NFTs are just altcoins with pictures. So that’s one side of things.

Akiba

But again, when you ignore rarity tables and stuff, then yeah, you’re losing a lot of potential utility from the project itself, aren’t you?

Justin

Yeah, absolutely. And I think it’s also, in my view, just a very short term minded view. I’m personally not really bullish on profile picture collections, 10,000 collections or whatever there is out there. I’m more interested in what I think we’ll see in the next few years in the NFG space that go beyond even just art. So that’s one side to bendell and then you have the total other opposites end to the spectrum, which the most successful project to date, I would say would be NFT Five or Nifty Five, depending on how you pronounce it. And what they do is they basically do NFT loans, or their marketplace for loans on a case by case basis. So let’s just say you come in with an ape, you have to signal that you want a loan. You basically have to sign a message to request a loan. Then basically you’ll get a bunch of offers coming in from different individuals. They’ll say, I’ll lend you Ten East at 10% and I’ll lend you twelve east at 15%, whatever it might be. And then the user has to sort of pick a loan. So it’s great at giving us like finetune metrics or fine tune loan to value ratios and interest rates for specific NFTs. But it’s very hard to scale because ultimately you need a bunch of individuals sort of like scanning through this marketplace, looking at who wants a loan, manually putting in biz or building some sort of bot to do it. And it’s just been hard for them to scale. And of course, for the user it’s not the best experience just because you can’t get instant liquidity. There’s this bid and ask process. A lot of times the negotiation happens in discord. But to their credit, like they’re offering more competitive terms, lenders are getting very high rates. I think the average interest rate on NFT Five, last I checked, was between 40% to 50%. So people are paying a lot for this leverage. And we think one of the reasons that rate is so high is just because the market is pretty efficient, just because that model, in our view, doesn’t scale well in the current form. But I should say, to their credit, they’ve had a lot of traction and done very well so far.

Akiba

So then what’s your approach?

Justin

Sure, so we looked at this and sort of tried to see what we could what were the best aspects, the aspects that worked well on each system and sort of try to combine that into a different model. And so you can think of us sort of like NFT Five, but we actually add what we call a third actor. We call it the three actor model. And so we add this third role in our system that we call the strategist. And you can kind of think of this as like a urine strategist. Basically these are sort of like the NFT appraisal companies or experts in the space that they’re exclusively working on building out appraisal models and valuing NFTs. In any case, we’ve partnered with several strategists that will be writing strategies at launch. But the short explainer is, like a strategist can write terms for any infinite number of NFTs they want. These terms get bundled together, they open up a vault and then anyone can lend money to that vault. And then if you have an asset that has an appraisal from a strategy, you can borrow instantly against that vault. So in a way, it’s like if you were to look at the Bendale model, allow anyone to appraise any piece, and then sort of all of these appraisers, we call them Strategists, are competing with each other to offer the best rates.

Akiba

Interesting. So what’s the main part of that that you feel is going to allow for better scaling? Because do you not still need lots of appraisers in order to scale?

Justin

No, definitely not. So these appraisal companies, like one example that’s probably, I would say the most well known, would be like Upshot. If you’re familiar with them, anyone can use Google and check out the website. I think all their analytics are public, but in any case, they specialize in creating algorithms to appraise different pieces. So I think they have several thousand collections appraised to date, probably a lot more than is necessary or people that are more than people want to borrow against. But there’s probably about ten of these companies that are focused on NFT appraisals. So every really few minutes they’re constantly updating their terms and providing valuations for basically any collection that has a meaningful amount of training volume.

Akiba

So instead of you needing them to actually appraise the pieces on your platform, you’re essentially pulling is it like an API data of their valuations and matching it with what you’ve got on your platform?

Justin

No. So we’re actually helping them integrate directly with us. We’re working with all of the appraisals companies, so there’s about ten we’ll probably launch with five strategists and we’re basically working with them. They can plug their system into our back end, they can post their valuations and update them as frequently as they need to. Those valuations are, of course, converted to terms, meaning like implied loan to value ratios and interest rates. And then the aggregate of those terms spins up a vault that anyone can deploy capital to or borrow against. So you might say, I really like Upshot or goblin sacks or deep NFD Value or Spiciest or whoever the Strategist might be. Apologies for leaving anyone out there, but if you really trust the Strategist, you might say, I really like their terms, I’m going to lend to those terms. And then, of course, for the user, we’re just bubbling up the best loan terms. So if you have an aviation or a punk or whatever it is, you don’t care who you’re borrowing from. It really doesn’t matter. You just want the best rate.

Akiba

And so we basically so it’s interesting you talk about kind of the future of NFCs and saying how you’re not bullish on the future of NFPs that are PFPs, given that’s where a lot of the liquidity is at the moment. Do you kind of a controversial take to have starting a project such as this?

Justin

No, I don’t think so. There are some things I’m very excited about in the art space. I love what Art Box is doing. I’m a proud Squiggle owner, which is awesome, but ultimately I think it’s great for artists. But launching a new 10,000 PFP collection that’s very formulaic, frankly not that creative, isn’t really it just doesn’t excite me. It’s totally cool if people speculate on it but I’m more excited about more, I guess I could say like real or financial applications of NFTs mostly.
Akiba

So tell me what does excite you?

Justin

Yeah, so the first one, and this is like very immediate, is the unitswapy three position. So like unitswapy three position lending I think is going to be incredibly powerful. Hasn’t been done before. I think it’s going to unlock a ton of value in the system. In addition, we’re already seeing like if you’re familiar with Liquidy, they have a product they call chicken bonds. It’s a lot to explain. These are bonds that are basically like NFT positions. Each one is unique and we’re going to hopefully launch support barring against these chicken bonds and in the longer term so those are just a couple of examples of financial NFTs or NFTs that have some sort of utility today. In the longer term though, I’m really excited about as more and more value from the off chain world comes on chain supporting loans against that. Since most of the value in the real world is non fungible, I would expect most of the value on chain eventually to be non fungible because how many more ERC 20 do we really need? Right?

Akiba

It’s an interesting approach. I was chatting to Jared Gray, the head chef at Sushi the other day and he was voted in through the Dow with his main message was about pushing Sushi towards kind of asset backed sort of tokens and bringing things on chain. So it seems like do you think that it’s a trend that we’re going to start seeing more of? I mean you kind of alluded to a degree but I mean in kind of like the more the medium term and do you think we’re going to start seeing more things come on chain? And what things would you expect to be kind of the first types of things that we’re going to see?

Justin

Yes. I can give you two examples of projects that I know friends are working on right now. So I think the first thing we’re going to see when we’re talking about bringing real world value on chain is basically like companies that have specialized in custody, custody and delivery of real world assets. Like when I say that I mean like the watch reseller or classic car collector, et cetera. So this is in line with the two examples one friend I have is working on basically it is going to be centralized at the start of course, which I think is totally fine, but they effectively appraise value and custody watches and so like a lot of folks in the crypto space. I just have a regular old Apple watch, so I’m not a watch guy. But a lot of people have a huge interest in collecting watches, not just for fun, but also for speculation. Like they believe they can outperform the market by buying a basket of Rolexes or whatever the hot brand is. In any case, this company would sort of you would mail in your watch, they would appraise it. They could issue a token on chain representing ownership of that watch, and then that token could trade freely. So you could fractionalize it and sell it. If you’re building a protocol, you could sort of aggregate 100 Rolexes at 100 tags and then allow people to invest in a basket or buy a fraction of a watch. You could borrow against it. You could sell it instantly and get instant liquidity. Instead of having to do that, like off chain in an auction or something, you could just list it on opens, here, wherever. So that’s one example. And then a friend that’s a large dealer of classic Lamborghinis in the Florida areas, like looking at how they can bring the value of their cars on chain for better price discovery, so that they’re not just running an auction in person, they can run an auction that anyone can participate in on chain. And then also they’ve noticed that a lot of their collectors are actually classic car rich and cash poor. And so getting the ability to offer them liquidity on chain is obviously very doable. So these are just a couple of examples, and I hope we see a lot more of these types of things coming online.

Akiba

Yeah, it’s interesting, isn’t it? In the traditional finance world, I think borrowing against a car is going to be very difficult, if not nigh impossible. And it’s definitely not going to be something you can get instant liquidity from. So I think that’s a really interesting aspect.

Justin

Yeah, ours are very liquid. They’re traded infrequently. They’re worth hundreds of thousands of dollars, but they don’t really have real price discovery. I mean, no one knows if you had one and you needed to sell it today to buy a house or send your kid to college or whatever it may be, it would be a process.

Akiba

Does it have to be classic cars? If you’ve got like a 1994 five Ford, I don’t know, Fiesta or something that might only be worth $500, the ability to tokenize that and you’re almost doing like it’s like an online pawn shop almost, isn’t it, to a degree where you’re getting something out from it.

Justin

I think the reason why the market will start with these high end pieces is because for it to work, you have to have a trusted centralized party that’s custody in the asset and then sort of like backing it on chain. If it’s just me, Justin, like, driving around in my car, I can’t really bar against that because if that entity is taken from me, sold fractionalized, how does that person claim it? You need to work with providers that are very specialized on custody, meaning protecting and securing the assets, storing it in a safe way and then being able to deliver it anywhere. When someone eventually does want to claim that and sort of burn the on chain asset and get the physical asset in real life, it’s interesting area to.

Akiba

Be looking into and I think it’s something that technology could probably help solve some of those problems in the future and in new innovations. So other than we’ve talked about PFPs, we talked about asset by tokens and the financial aspects of kind of the top V three, what size of market do you feel like this could become? And when you take all of these into context, so when you’re planning to launch the project, where do you see kind of the ceiling being for this?

Justin

Well, in the short term, I forget what the stats we were looking at this earlier, but in the short term, there’s only a few hundred thousand dollars worth of NFT loans originated each day. I think to date we’ve probably seen a couple of hundred million dollars of NFT backed or loans backed by NFTs, most of that volume attributed to NFT pie. So today the market is quite small. Obviously NFTs are currently a multibillion dollar market. It’s going to go down, it’s going to go up in the future, but I’d imagine it will be as big as the ERC 20 market because frankly, the next big use case for the technology of the ERC 721 and just non fungible tokens in general is sort of undiscovered. Right? I think these are just things I’m excited about, but I think probably the next wave in this space is something we just can’t even think of right now.

Akiba

There’s people talking about the fact of your crypto wallet along with your NFPs being your online digital identity in the future and things like co ops and the such will act as kind of like your social graph as to where you’ve been online and how you’ve interacted with things. So I think the ability to then be able to utilize your digital identity to gain liquidity is kind of an interesting concept as well. Do you think of it from that aspect at all as well, that these entities will be a part of people’s lives from things that they’ve got from being involved with projects, not just necessarily say, buying it on open sea?

Justin

Yeah, it’s something we’ve sort of just briefly talked about indirectly. So we talk a lot about, I mean, this is not something we’ll be doing at launch and not something we’ll be doing in the first six months, but we talk a lot about on chain credit and we’ve talked to a few projects working in that space. And ultimately, if your record for your account is totally transparent on the blockchain, which it is. Theoretically. A sophisticated strategist in our system could offer better terms based on the address that wants to borrow. I mean, we have that built in now, so if they see like, you personally have a history on NFT five, you’ve never defaulted, you’ve taken out 300 loans. Presumably we might be able to offer or the strategist, I should say, might be able to safely offer you a slightly better interest rate than someone that’s totally fresh. So we think a lot about stuff like that, but I think it’s still very early days. I’m not smart enough to think of a way to connect on chain identity and provably guarantee that you or me, for example. That seems very tricky.

Akiba

Yeah, it’s an interesting concept. I’ve never really thought through before the idea of kind of your wallet’s credit score through your activity and I guess it also then starts to go into ideas of using NFTs to sort of co sign for loans and things like with smart contracts. The future is almost endless of what could be done with this technology and I think it’s absolutely fascinating and we need projects thinking of the different aspects. So when do you launch? Because I was on the website earlier and they still just a sign up form.

Justin

Yeah, we have to update our landing page, but we just completed our third audit and we’re going through results there. So we did a code contest through Sherlock, which is similar to Code Arena, if the listeners are familiar. And then we’re just scheduling an audit. Actually our final audit to start a week from today, so it’s a little tough to say. Like, I think the audit is scheduled to last for three weeks and then we have a one week change period, but that would push us into the holiday times and we’ll be launching in early January, early to mid January is the goal.

Akiba

So brilliant. So you’re basically in a position where you’re ready to go, you just want to make sure everything is checked, get through your audits, but from a production point of view, you’re pretty much there.

Justin

On the smart contract side, we’re basically 100% there as far as like, design UI, UX and just building out our back end infrastructure. There’s a little more work to be done. I think the majority of the work over the next month is reviewing the audit reports and implementing any changes and then also implementing the design for the actual app itself, which we’re obviously in the middle of, and then just sort of lining up and coordinating with all of our launch strategies. That’s sort of a heavy feat, making sure that they’re all comfortable. We’ve tested with all of them and they’re ready to go at launch and yeah, we’re trying to make a little bit of a splash. We’ve purchased $10 million of insurance from Nexus Mutual, so we’re going to insure the platform as a company for the first three months, up to $10 million. And we’re debating now if we’re going to hard cap or do a soft cap on the UI to only accept 10 million. So we’ll see. But yeah, we just want to make sure users are safe because that would be definitely the best thing to lose funds.

Akiba

That was going to be one of my next question. Does everything happening in the market at the moment affect how you feel about launching something into the Web three space right now?

Justin

Yeah, I don’t think it definitely does not change our timeline because at the end of the day, we have to do the best we can do with what we have, but certainly fewer folks will be excited to take on leverage. I mean, this seems like it’s a very risk off environment to me at least now. I mean, it could change on a dime another month or two, depending on what happens in the world. You really never know. But we’re marching forward and just going to make the best of what we have. But yeah, I will say, just personally, I’m less excited to tell people I work in crypto today than I was two days ago. I don’t think it’s a great look for industry what happened.

Akiba

No, not at all. But I think also the meme of bear markets being builder markets, I think the best projects, not just even in crypto, come out of bear markets and getting yourself ready now for a hopeful future bull run. I think it’s actually one of the best times to launch, even though you’re not going to have necessarily that kind of moonshot approach straight away, but having more sustained, slow kind of retainable growth is a better way to go about it anyway.

Justin

Yeah, if you look at the DFI really the onchain landscape today, it’s hard to find more than even a handful of actually innovative new useful projects. It’s hard to find. Right.

Akiba

Just to cut in slightly, I probably get five to ten requests a day on new D, five projects that either interview or cover in some way, and yet nine times out of ten, I’m just not interested for exactly that reason. It’s not new innovation.

Justin

Yes, I have a YouTube channel as well, so I also get just as many inbounded it’s all just copy paste stuff there’s Uniswap, Ave Maker, everything else, I don’t really know. I mean, I’m sure I’m missing something. There’s some innovative NFT lending protocols, NFT exchanges, but at the end of the day, there’s really only a handful of innovative, unique applications and it seems like all of those were built 2017 1819, leading into 2020. So we’ll see.

Akiba

No, certainly. Well, Justin, it’s been an absolute pleasure. We’ve talked a little bit about what’s going on in the market, but to just talk about the future for a little while and kind of where things can. Go with NFTs. And I think it’s really interesting for this episode of The Slate cast, everyone check out this area. Likely, you say early January is likely going to be the time?

Justin

Yeah. So if you follow us on Twitter, you’ll see every update we put out publicly.

Akiba

Do you have a discord or anything as well?

Justin

We do, yeah. It’s linked on the Twitter. That’s probably the easiest way to find it. Cool.

Akiba

So head over onto the Twitter and you can get involved with there. Just stick around in the backstage area for a second before you go. But for this episode of The Slate cast, thank you very much for joining me. Justin, it’s been absolutely pleasure talking to you and we’ll see you all again next time. Thank you. Goodbye.

Justin

Thank you so much.

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