Looking at the bigger picture
If we take a look at the NFT market today we can see that there are two main niches that gained most of the traction and are the main drivers of growth: Gaming and Art.
We could say that both niches satisfy different user needs and each one is quite different in the way collectors perceive the properties that give value to NFT assets.
For example, in gaming we have more utility attached to assets while in art the assets are closely linked to the brand that the artist has created for himself. But even with utility, we are still left with a lot of intrinsic value that is derived from the sole perception of the buyer over the actual price and scarcity plays a big part in both niches that makes an objective valuation even more difficult compared to fungible tokens.
Looking at the market in terms of adoption, we can immediately notice that there will always be a big diversity of asset types and a big influx of new projects launching and testing new ideas and with the barrier to entry getting even lower, we can only estimate that the volume of new projects and ideas will increase in the future.
Taking this context into consideration, let's see what role will automation play in the NFT lending space.
Lending with fungible vs non-fungible assets
Crypto lending platforms have seen exponential growth in the past two years and with the emergence of DeFi into the space we have seen the growth accelerating even more. Compared with 2018 era where everyone was asking what would the utility of this space look like in the future, now we can see that lending played a pivotal role in providing real value in the market with products that actually had real adoption and traction.
We think that the case stands with NFTs as well and as the market grows, the need for collectors to leverage their assets without selling them will be a natural one and maybe even stronger if we take the intrinsic value into consideration.
But there are a few key differences when we compare lending with fungible vs non-fungible assets:
- If we look at lending with fungible assets, we can see that most of the platforms operate only with a handful of assets that have high liquidity. In the NFT space this will be impossible because there will always be a wide range of projects and inside each specific project, the actual assets have a wide variety of properties that makes most of them unique.
- With fungible lending, valuation is automatically done by oracles with great precision and the price is objectively determined by the market. In the NFT space, this will pose a big challenge because with most of the projects, the price is not driven by volume but by scarcity and hence the actual valuation is mostly subjective.
- With fungible lending, liquidation happens automatically when the borrow price gets closer to the market price, increasing the LTV ratio to a specific threshold. With this mechanism, the lenders and the platform can never lose in the entire process. In the context of NFTs even if we could have thresholds for verifying the actual volume for the entire project or the class of assets that is associated with the collateral asset inside the game, because the market is driven by scarcity by design, it will always have friction and downtime in the scenario of automatically liquidating the assets by the system in order to cover the loss for lenders.
Taking these factors into consideration, we can already see that NFT lending poses some unique challenges compared to "traditional" crypto lending with fungible tokens, but not all is lost.
At Stater, we believe that this is an opportunity to rethink the way in which we can deliver an amazing product on the market that reduces spread and friction between lenders and borrowers.
Making fast loans possible for NFT lending
One of the main disadvantages with a P2P marketplace is that it generates friction by design and it is hard to match lenders and borrowers with the same objectives and desires.
Our approach to this challenge is to have a P2P marketplace as the core product and on top of that to offer users the option to get a fast loan that is given by a lending pool only for specific assets that are considered fit by our system.
In order to make that possible, we would need to take a few main factors into consideration that are related to the project and the asset.
In the recent period, there are some debates inside the NFT community on the best way to value each asset, but in our view the fact that you can't actually value an asset objectively is what makes it so special and we don't actually need to know the "objective" value of the asset in order to make pool lending work.
In order to make pool lending work, we should let the market value each asset subjectively and focus only on those with proven and trusted trading history from projects or artists that have a positive track record and use the LTV ratio and interest rate as the main tools that would help us mitigate the overall loan risk.
In this context, we would need to have a better focus on assessing the actual project rather than the asset in order to make sure that in case of defaulting the loan, the lending pool will not be at a loss.
By creating a good LTV ratio and interest rate balance based on the actual game risk, we can also make sure that we will only need a small percentage of the total defaulted assets in our custody to be sold in order to break even.
Metrics like volume and growth for the specific project, asset price range/avg asset value and other metrics related to the overall due diligence process are essential in order to make fast loans with lending pools available.
At Stater we believe that NFTs are here to stay and offering users the option to leverage their assets without selling them will bring a new wave of innovation in the space.
As we are getting closer to mainnet launch, we are preparing to bring new upgrades to our core product and make fast loans and pool lending a reality for our users.