In this episode, Ben, research analyst at CoinGecko is joined by Stephen Young, Co- Founder of NFTfi. Stephen gives us an insight into the world of NFTs, the challenges faced unique to NFT-type loans and how NFTfi aims to pave the way for NFT loans!
[00:01:52] Stephen’s professional career and artistic background
[00:02:37] What is NFTfi and how does it work?
[00:06:04] Stephen’s favorite NFT?
[00:08:57] Challenges faced: NFT vs. DeFi type loans
[00:13:07] Why is provenance important?
[00:16:56] What creates value for NFTs?
[00:23:55] The correlation between mindset and value in NFTs
[00:29:03] Thoughts on fractionalization NFTs
[00:31:51] How to address the core issues faced by NFT holders?
[00:37:54] How do you spot a fake NFT?
[00:43:00] Stephen’s thoughts on NFT collecting
[00:50:40] NFTfi’s plans for 2022
Quotes from the episode:
“when NFTs came around and, you know, really allowed me to take my professional career where like having a history in software development, as well as finance and combine it with one of my private passions, which is art” [00:02:25]
“...what we allow on NFTfi is, it allows people with NFTs to get a cryptocurrency loan using the NFT as collateral.” [00:02:43]
“NFTfi is a peer to peer marketplace, where people with NFTs can list their NFTs on our platform and people with capital, can then make them offers to give them loans on those NFTs, using them as collateral.” [00:02:52]
Watch the Podcast on YouTube
NFTfi - https://www.nftfi.com/
CoinGecko - https://www.coingecko.com/
Bobby Ong [00:00:00]:
Welcome to the CoinGecko podcast. I'm your host, Bobby Ong. Each week, we will be interviewing someone from the blockchain industry to learn more about this fast moving cryptocurrency economy. And this is your first time listening then, thanks for coming. The CoinGecko podcast is produced each week to help you stay ahead of the curve. Show notes can be found at podcast.coingecko.com. Highly encourage you to join our newsletter where we send out top news in the crypto industry every Monday to Friday. Come back often and feel free to add the podcast to your favorite RSS feed or iTunes. You can also follow us on Twitter and Telegram at CoinGecko.
Hello everybody. My name is Ben. And for today's focus session, I will be your host today. As usual. Today, we have a very special guest, his name is Stephen Young, co-founder of NFTfi, right? Stephen Young has been building and designing software for banks, financial institutions, and fintechs since 1998. He's actually a co-founder and chief product officer at Coindirect, a cryptocurrency exchange, and OTC desk. Before that he was actually a software architect and the head of designer, head of digital marketing at the largest private financial services company in Africa. And you know, now that you have a background, we can get to the crux of today's topic, which is actually NFTfi and you know, a bunch of how are we going to dabble in NFT space? I think a lot of our viewers might be interested in how. You know people value NFTs or what, and I think the best guy to do his actually Stephen here today, because NFTfi is a interesting topic. It's actually looking at setting up NFT loans and there's a lot of interest in that area right now. So good to have you, Stephen, welcome to the show.
Hi Ben, thanks for having me.
Yeah. Yeah. So, you know, I, I covered quite a bit, you know, I've rambled a bit and I think just to kind of set the scene, right? You know, as an NFT expert, what would you say is your favorite NFT to date?
Yeah. So yeah, maybe just to like add one thing to kind of that bio is, you know, that was my professional career, but as a, you know, in my private time, I've been taking photographs, so I'm an artist I paint, I draw. So basically, you know, since I was like 10 years old, I was into art and paintings, so you know, when NFTs came around and, you know, really allowed me to take my professional career where like having a history in software development, as well as finance and combine it with one of my private passions, which is art and like the creative process. So NFTfi is, is it really kind of combines those two loves for me and what we allow on NFTfi is, it allows people with NFTs to get a cryptocurrency loan using the NFT as collateral. And the way that it works is that NFTfi is a peer to peer marketplace, where people with NFTs can list their NFTs on our platform and people with capital, can then make them offers to give them loans on those NFTs, using them as collateral. So if I've got, say a Bored Ape, I can list my Bored Ape, and then people who are interested in loaning against Bored Apes can see that listing and they can make me offers and an offer consists of a loan periods, loan principle, and a repayments and bounds. So so for example, I would get a 20 ether loan offer over 30 days after pay back 21 ether. And I would then get multiple of these offers and then I can, I'm under no obligation to accept any of them. So I can just look at whichever one I think I liked the most then if I do like it, I can accept that offer. And upon accepting that offer the NFT is transferred into our smart contract to be held as escrow. So even NFTfi the team has no access to that asset, it's only in the smart contract. So it's completely trustless. This then a held in that smart contract until the loan is repaid. And at the same time of that NFT being transferred with a smart contract, that the loan amount is transferred from the lender to the borrower, and that all happens in one transaction. And then the borrower had this, the loan period to repay the loan. We don't keep track of prices. There's no automatic liquidations, if you agreed on 30 days, you've got 30 days to repay their payments amount. And then at the end of that period either you repay before the loan expires, in which case the NFT is transferred directly back into your wallet. And the repayment is transferred from your wallet into the lenders wallets, including the interest. And then NFTfi will take a 5% fee of the interest as part of that transaction. And then if you don't repay on time, the lender can foreclose, in which case the NFT is transferred out of our smart contract into the lender's wallets and the borrower who just doesn't owe anything back anymore. So they basically forfeit their NFT as repayment.
Yeah. I mean, that's really cool right? I think you pretty much covered the gist of why I wanted to, I shared earlier. And I think what's really interesting is that this offers a lot of liquidity to everyone, especially for energy collectors, you know, there's always the running joke, we're all illiquid and NFTs are a, it's a huge part of the issue, right? And I think platforms like NFT, if I'm not mistaken, I actually pronounced the NFT-fi which now I'm learning it's not correct just now.
So yeah, NFTfi, it's, it's pretty cool you know? So, this is quite interesting, right? So there's two angles I want to cover here first, which leads me to my other question. I actually earlier asked what your favorite NFT is, and the reason I asked, is cause..
So the reason why I ask this, because it's kind of close to what NFTfi does, right? How does that lead to, you know, valuations and all sorts of things we talk about, pretty much peer to peer and there's a strong tie in with, you know, what your favorite NFT is because my next question would be, is there future plans to, for example, become more like a bank like Maker or Compound where the protocol itself offers interest rates on NFTs. You know, there's all sorts of considerations coming into that, but yeah, I digress.
Okay. So yeah. So, sorry. Let me get back to answering like what my favorite NFT is. So I've got a couple, one of my favorites is actually, I've got a, found a Crypto Kitty, so I've got Crypto Kitty number seven GPU. And one of the reasons it's one of my favorites is, you know, like CryptoKitties is really, like was one of the big capitalizing things starting this whole, this whole space for a lot of reasons. Regardless of the fact that they early a lot of the people who are now building in the space are actually originally from the CryptoKitties team, or they learned about NFTs in the CryptoKitties world. So, so I just think it's like a really historical project. And the second reason I liked that Crypto Kitty is because I actually got it in a default very early on in NFTfi. So, so it's like, oh, I got it through the actual platform. And then also I think it's super, it's a historical like a piece and in my other favorite one is an Autoglyph. So I managed to get that brand affordable. Now they're, you know, crazy. And like the order list is actually a really good example of like, why you would want to use the device. So, you know, so Autoglyph are, I mean, there's 512 of them. They are extremely rare. They're the first fully on-chain, again it's a project by Larva Labs. So people who did CryptoPunks and Meebit, it's super, super historic the space too. And they're quite expensive now. I think the floor price I checked last week was like, I think 170 ether now, for Autoglyph. But there's only 112 owners and that hardly ever go on sale. So I would never really want to get rid of that, without an Autoglyph because it's like owning a part of history. And you know, like I have a really strong attachment to that piece. I mean, there's significant capital in there that I want to be able to put, to use. And for a lot of people who are in the NFT space, they were buying these NFTs and when they were worth, you know, you could get a lot of these things for, less than 1 ether. Exactly. You know, so a lot of these people now, a significant portion of their net worth is actually tied up in in these NFTs. And now, so either they have to sell them, and in which case, like there's a difference between NFTs and like normal cryptocurrency. Because if you sell some ether, now you can always buy more ether. If you sell an Autoglyph now, you're not guaranteed of ever being able to buy one back. So that's kind of why I think people are really kind of interested in using these things. They want to keep the assets that they have an emotional attachment to them, or they are collectors are actually building up a collection of art. But at the same time, there is significant capital locked up in here that they want to put to use in other parts of the ecosystem, or, you know, just, you know, something like you putting a down payment on a house, you know, and you need to have. And it's cheaper to borrow and much less work to borrow on your Autoglyph than it is to go to the bank to get a loan, for example. So that's I think part of the reason why you would want to use these things. And then your second question was around, you know, would we ever become peer to contract. Yes, like we're not opposed to it, but I think there are some significant challenges into this. And I think it overlaps quite a lot with like just the general problems that you see in the NFT space. And we can maybe get into that a little bit later, but you know, a few things that I can kind of name off the top of my head are these prices are very subjective, you know? So it's difficult. You can't just look at floor price because you also need to look at, you know, what do you think the trajectory is going to be? What do you think the team is going to do? What do you think the whole space is going to do? The other big problem is that when prices drop, liquidity dries up. So just when you really need to sell it to kind of to, because when are you most likely to get defaults? When the prices drop, when is the hardest to sell NFTs? When the prices drop, because prices dropped because liquidity dries up. So liquidity dries up first, then the prices start dropping because people are now trying to sell these assets, but nobody's buying so they keep dropping their prices. So it makes it quite difficult in those scenarios to kind of actually liquidate these assets into, to make the loan whole. And then again, because the prices are subjective, these peer to contract models are, they work really well for floor assets. So, you know, if you have like the cheap floor NFT it's easy to algorithmic a cool, well, we'll give you a 20% LDB on this floor asset. But if you have a rare high value NFT, to, to really understand the value of the other asset often requires a little bit of like you know, human kind of intervention in, in these pricing models. And the other big thing is, again, like I said, because people have emotional attachments to these assets and then not like a fungible token where you can just always get another one. Also liquidations actually are quite risky for a lot of these asset owners because they don't necessarily want to be liquidated. And, you know, so even if the value drops to below the current price, like for Autoglyphs for example, even if the full price is a certain amount, it doesn't mean that I would be willing to sell my Autoglyph at that price. So I might still want to repay my loan, even though the full price of Autoglyphs are below my actual value for the actual loan. So there's all of these things that make it tricky to do these like peer to contract style model. I do think there's a place for them. LTV is loan to value. So basically if it's worth a hundred thousand dollars at 20% LTV will be $20,000 loan on the actual asset. So if you want low LTV loans on floor assets, that's probably quite an easy way to do that because you can get that loan instantly, you don't have to wait for it to match somebody in a peer to peer style. But having said all of that, we all releasing a version two soon and we've changed it from being a very loans focused to being a more general NFT agreement protocol, which means we can add these kinds of peer to contract style loans relatively easily. And the other thing that we have is we've got a full API that allows people to see which assets are listed and make offers on them, which allows people to run automated strategies, using a bot on top of our kind of underlying core contracts. One of the reasons we like this is because it allows other people to come up with new models on how to price these things and then have them compete against each other. So the market can decide which one is, is the best. And actually think there is a place for multiple strategies in this because you know, some people want a quick loan and low LTV, other people don't care how long the loan takes to get, but they want to get the maximum capital out of their assets that they want. So I think there's different strategies that had worked for different people at different times.
Yeah. I mean, that was a lot, it was very interesting, right? What you shared there's a lot of plans for NFTfi. And It's quite interesting where you talked about, you know, the fact that you're trying to build a V2. I was saving a little bit for later because I think that will run off our discussion nicely. I just want to kind of angle the conversation somewhere else, right? Because NFTfi is like to build on the premise that NFTs are valuable, right?
There's value behind our JPEGs. As an, every night as a collector. I get it. But for a lot of people out there who are not familiar NFTs or who just believe the hype, or, you know, it's all a scam, I kind of want to discuss that area, the topic of interest first. With that in mind, you know, one of the things we always talk about for NFTs, it's very interesting because digital technology and the blockchain allows us to see who were the owners before, who owns it now, right? Another term for that is actually called provenance of origin. And for NFT collectors, this is valuable and is technology is valuable, so you share with audience, right? Why is provenance important for NFT?
Yeah, so I think this is one of those things that people just kind of expect in the blockchain world. So maybe a good way to, to explain while I support is to explain how big of a problem it is in the traditional art world. So if we wanted to do this exact same business in the traditional art world, there's like a few things that make it more complicated. First of all, we need to have like access to the asset and be able to kind of transfer it back and forth. But let's just leave that aside before we can make that actual loan, somebody needs to look at this, this artwork and see, is this actually really a Picasso or is it just somebody who made a copy of it? And how do you know that? And the process to determine that is A) like error prone. So I think there really start somewhere I think that's upwards of 20% of artworks that have sold are fakes. So you need to have a fully expert team. You need to be able to get them access to the artwork. They need to kind of do a full provenance check. You each have to check the certificates. It becomes like a really cumbersome, difficult process just to know that you're actually buying what do you think you're buying. In the NFT space, you check the contract address. And if the contract address is the same as the contract, that's minted like Autoglyphs, then you know, it's an Autoglyph, you know, there's no way to kind of sell a fake asset in that way. There are other ways that this can become a problem. But you know, as long as you're buying like a well-known project where it's easy to determine what the original contract was, you can just check the contract of address. So that's like a tick box that, you know, was just, is this like a problem that just doesn't really exist in the NFT space? The other thing that that happens is sometimes the artwork's value is actually increased by who owned it in the past. I'll give you a good example. So if you look at Autoglyphs, I mean, CryptoPunks. Would Jay-Z's CryptoPunks, if he ever sold it, would that be worth more than another Punk with the same traits to somebody who's a big Jay Z fan? Probably, right? It's bragging rights. I bought Jay-Z's CryptoPunk from him. So you can actually have history of how something was owned and who owned it actually contribute to the value of the actual asset. You just kind of seeing this, like, especially with Bored Apes, actually. So Jimmy recently made a deal with like a big music company, where they're going to make a, a band called KINGSHIP, and the characters in the band are four Bored Apes that Jimmy owns. So if KINGSHIP becomes a number one selling album, those NFTs are going to have significantly more value, than another ape with exactly the same rarity traits. So, so it gives people the ability to actually proactively do things to their assets to increase the value, and then you know for sure that this is that asset, because again, you know, everybody who's owned it, you can check that this was actually the eighth, that was anything show, you know, so it creates this whole new dimension. That's very easy to trace and very easy to prove. All of this could be done in the traditional art world, it's just much more difficult to then track, is this actually that actual asset?
Yeah, I think you talked a lot about the traditional world, right? But it actually also solves a existential problem in the digital world, right? For the longest time digital artists could be copy pasted, you know, Google image that everything is very hard to trace in the Internet, but with blockchain, it also solves that.
Yup, exactly. So one of the things that's like a key characteristic of anything digital is that it is infinitely copyable. So you can have as many copies of this asset as you want, but what NFT s allow us to do now is as an artist, you can say, this is the original. And actually what you're really selling is it's more like you're selling the signature of the artist, saying that this is the original one, as opposed to the actual image. Obviously there's a lot of other stuff you can do on top of that, but it's now created a new market for like a huge creative class that can now actually make a living, selling their art instead of selling their skills to a commercial entity. You know, so before, if you wanted to make a living as an illustrator, you needed to get a job with Nike. You would, you know, work and get paid an hours for some image that you produce for them for a campaign. You know, you can't just follow your creative urges or you're working for somebody else. You don't get any kind of subsequent kind of upside afterwards. And now all of a sudden you have like a new, I heard somebody call it the birth of the, the creative middle class. Before you would either you either be a rich artist or a starving artist, there was no in between. And all of a sudden you can actually make a decent living. Maybe you're not going to become a multimillionaire. You know, obviously the upper, you know, the Beeples of the world obviously kind of like end up there, but there's a whole group in the middle who can now sell art to their fan base directly on a global marketplace and actually earn a living, doing what they find creatively stimulating as supposed to doing work for some commercial entity.
Yeah. You know, basically what you've been sharing is that if you solve a lot of existing issues and that's where its value comes from, right? And one of which is the value of problem, but you know, for a lot of people out there, they think that it's a bubble. Oh, it's going to crash. You know, why are people throwing millions of dollars into it? Is money laundering. Is to avoid tax? And then there's all sort of these kinds of statements there, right? From your perspective as an NFT collector and NFTfi as well, you know, where else does the value of NFTs come from aside from provenance?
Yep. So I think what's important like if you're starting to think about like how much is an actual NFT worth is, we need to just realize that like NFT is massively broad term. So really all an NFT is, is a unique digital thing and that can be anything, you know, we are already seeing things like an NFT could be, could represent an LP position in like UniSwap for example, an NFT can represent a collectible, it can represent a one-on-one art. It could represent generative art, which is a lot of these generative art projects are like half a collectible half artwork because it shares some of the traits of the collectibles. And that there's more than one of them, you know, they have different like rarity factors, but they're also have a visual artistic component to them. So I think it's very important to realize how you're trying to value this asset. For NFTs that actually just represents a financial position, you would do it exactly the same way that you evaluate other financial contracts or what is the future expected cash flow? What do I expect the growth is going to be? You can do some maths and you kind of figure out like, what do I think this asset is going to be worth. For a collectible, you're looking at how big is the community? What are they got planned? What else do I get for owning this thing? So for Bored Apes for example, if you were at NFT NYC, you could get into the yacht party, you could get into that. You know, that awesome concert of that they had. At the time, there's a tattoo parlor in I think it's in Spain that if you own a Bored Ape, they'll give you a free tattoo. So there's all of these things that are happening around the asset that like adds additional value kind of in the real world. So that's kind of on the collectible side and that's also then looking at rarity, so different rarities have different values. And then when you're looking at art, a lot of the same things that give traditional art value, we'll give NFT art value. So what is the reputation of the artists? Have they done other good work in the past? Is this as a historically significant piece? Is it moving the space forward? What is the quality of the actual visual art? Is it good? So all of these things kind of, kind of come in and then, to some degree there's also just fashion. So, you know, if certain things become popular because famous people bought them, so that then gives them like a bump up again. So it's really difficult to determine. Just to give you a single answer, you really need to kind of go look at like each specific thing and each specific project. You know, add on top of that, so like Larva Labs is a great example. If you, you owned a Autoglyph or a Crypto Punk at one stage, you could rent a free Meebit for example. So that's almost like NFT based yield that you're getting for owning the actual assets. Other people are getting airdrops of the governance tokens based on ownership of specific sets of NFT. So as a good example, Sabato, it's a AI powered generative art project, where if you own a certain number of NFTs from specific project, you got free Bato tokens, and then those Bato tokens gives you the ability to vote on which of these generative artworks are good. So it gets really complicated. But yeah, so I think it really takes some work to kind of look at each individual project. And then, you know, this whole thing about it being a bubble and that everything's going to crash. Like I do think we are in quite frothy prices. It's come off recently a little bit. Like things that have kind of dropped a bit, but I think it's similar to, to, if you think about like, you know, the 99 kind of tech boom, right? So most of those companies don't exist anymore, but Google and Amazon were around back then, right? So some of them that were there, like stayed and became mega valuable. And a lot of companies that were formed in were just too early and there are now companies that are very valuable. They do exactly what those companies did back then. So just because something, you know, because there's a bubble doesn't mean that the whole space is a bubble. It just might mean that certain products, like a lot of the projects have more value right now than they should. And it's a lot of these projects are completely undervalued right now compared to what they're going to be in the future. And if I knew what that would be, then I'd be a rich man, right? So it's, it's really difficult to tell, but I think, I do think that the space has got a bright future certainly projects that are alive now have a bright future. And other projects are just going to go disappear again.
Yeah. What you're saying is that will be blue chips and there'll be those that just die, which is usually 99% or 90%, heheh.
And, you know, there's always this overarching advice that I always feel from the space in general, a crypto Twitter, and anyone that knows the fact that, oh, you know, when you buy an NFT you should not think from an investment's perspective, you think about it from an creative perspective. Basically your personal preference. Do you like this NFT? What are your thoughts on this? Does this necessarily correlate with value?
Doesn't necessarily correlate with value. I do think certain people who really understand the space and like have, like, for example, our designer at NFTfi, he's like he's a eclipse, traditional arts, you know, his sister is a sculptor. A lot of his friends are artists. You know, so he's got the really good eye for what is good art. So, so generally what he likes tends to be the good stuff. So I do think there's certain people who have the right kind of skillset to be able to determine what's valuable in specific projects and that they just like, they taste just leans to those things that are more likely to be valuable. I mean, he doesn't always get it right either. But I think the reason that advice has told us so often is because, you know, so there's a bunch of us that have kind of been in the space since, you know, for two, three years, we kind of know what's going on. And then people come to us and say, what should I buy? And typically, the things that I have a high confidence in that they, that they're going to stick around are already very expensive? You know, like the Fidenzas and the, the Autoglyphs and the Crypto Punks and the Bored Apes, like they're likely to stick around, but you know, like you're talking 50, 60 ether floor, which is way out of people's reach. So when the people then come them and they ask people with a lot of experiences in space, which one of these projects that cost less than 0.5 ether, are going to be valuable in the future? And it's almost impossible to tell. And because of that fact, you should at least buy something that if it doesn't end up being valuable, at least you have a picture that you like that you want to put up on the wall, right? Like, if my friends come to me and say, what NFT should I buy? I'm like, I don't know which ones are going to be valuable. So buy something you like. Yes. I don't think there's actually a real correlation between valuable or not. It's just that it's so hard to tell you, what's going to be valuable five years from now, at least you should buy something that you like.
Yeah. I mean, it's, it's kind of like it's practical advice, right? Buy it and with expectations that it goes to zero. So at least you're happy. Yes, hehehehe.
And then if it goes up, it's a bonus. If not, you've got awesome artistic on your wall. I think there's also something to be said like that, you know, that whole creative middle class, you know, so I also buy lots of like one-on-one art, from artists that I don't necessarily think are going to become super famous, but I like their work, I want to see them produce more of it. I like supporting them. And then buying the artwork often allows you to form a relationship with them. So you kind of, you stay in touch, you, they tell you about the new things that they're doing. Like it allows people to kind of like become a patron of the arts for artists that they like and kind of create this creative middle class of people who can kind of earn a living, being creative. And I think that's a worthy thing to, to be part of.
Yeah yeah. It's very interesting because you know, what I observe is quite different this, that, you know, token is pump and dump schemes. With NFTs I feel like it's more personal, right? There's the kind of relationships that you built between creators and buyers is quite authentic because there's always that, I put my heart out into this, appreciate it. One example I can think of that you mentioned is the Sea Ham project, right? Sea Hams. Essentially the artist let out a source project and anyone who holds this project holds an NFT from my first project gets the access to all my later projects. There was this kind of a utility and relationship building that it's the great thing about NFTs.
Yep, completely agree. Yeah.it allows you to form like a actual kind of human, emotional connection, that is just very different. You know, like you said, with, with ERC-20s, it is a financial instrument. So, so yes, it creates incentive alignments, but the incentive alignments are around profit. How much money can I make? And if we all go up together and we all like push this project, then we're all gonna make money together. Which is, you know what I mean? I think it's super useful and it's like, you know, it, it allows us to do things and coordinate on a scale that was never possible before. But it's a very one dimensional kind of alignment. I mean, sometimes there's also a little bit of ideological, you know? So like, you know, but when Maxis, Ethereum maxis that also have like a worldview that they all kind of ascribe to. So I don't want to kind of make it purely a financial thing. Like I do think there's other things in there, but I think, NFTs, like you said, allows smaller communities to form more emotional, personal connections where the connection is about the art, it's about the feelings that are being produced in this community, as opposed to purely a financial motive. But there's also a financial motive, right? Like if lots of people collect the project that you, that you own, obviously that's also a good for you, but it does have this other more human like angle to it that you don't really see in ERC-20s.
I'm going to ask the next question is kind of a out of the ballpark question because we are taking a step back and looking at NFTfi again because NFTfi like you said, you know, offers NFTs to be collateralized and you're setting up a peer to peer platform, right? And for many people, the alternative is to actually just, fractionalize an NFT. Could you share your thoughts and opinions on that? You know, what do you think of fractionalized NFT?
I think fractionalization has its place, you know. So if somebody wants to just get exposure to the NFT markets. You know, so like there's people who come to me, who's saying, which NFT should I buy as an investment? In that case, it's probably better for them to go buy a fraction of a Bored Ape to get some exposure because they don't care about actually owning the Ape. They don't want to, they don't want to use the eight to get into that yacht party. For example, they just want to get financial exposure to the upside on the actual market. So I think it's very useful in that way for people who don't actually care about the art to art collectors, who just want to kind of get financial exposure, but can't afford to buy a blue chip. It gives them access to those blue chips. As a collector, and like having spoken to a bunch of collectors, fractionalization isn't very appealing to them because they don't actually own the asset anymore. You can't use that Ape to kind of get into special events. You, you're not going to be able to take that Ape and then like, you know, give it a potion to make it a mutant ape, you know? You kind of cuts out this utility and the end it just becomes another financial asset. What we say internally at NFTfi is that, you know, these kinds of things where you try to make unique assets not unique, you taking the end out of NFTs, right? So you, you making a non-fungible token and fungible again, and then it's back into like a financial instrument that is kind of used for financial good, for financial things that can fit into the existing DeFi infrastructure. But you lose a lot of the specialness of the assets, but like I said, that doesn't mean that there isn't a place for it. You know, there's all different kinds of people who want to participate in the markets and some of them just are investing. And that's also good because that brings in capital into the general market. I think there's a place, it's not something I would ever do with any of my high value assets though.
Yeah. I just want to share actually fractionalization is not really a new concept. Right. You know, even the traditional art has done something like this. I mean, they don't exactly cut up the picture and stuff like that, but they do have everyone getting a stake in a particular painting and spitting it out. And anyway, I just want to take a step back and look at, you know, what you mentioned, NFTs offer a lot of utility. They have the ability to solve a lot of different issues for artists and et cetera. But at the same time, you know, NFTs is still brand new, right? We are still rarely, you know, that's the famous quote. And with that, there are actually a lot of challenges that the industry still faces, right? For participants in the industry you know, for collectors and creators, what would you say are the core issues to date for collectors and creators? How should we address these issues?
Yeah, I think one of the obvious ones is just the insane gas tolls that happen whenever a new like mint gets dropped. And making like the people who want us to buy these assets pay a higher price for it than they would have otherwise. So I think that's a big problem to tricky problem to solve. I think reverse Dutch auctions are probably the better way to kind of go about that. Like it does help a little bit You know, during this recent Adidas drop, I think $7 million was spent on...
Sorry, it went up 3000 Gwei, I'm not mistaken, hehehe.
Yeah. So in 3000 Gwei, which is nuts and they in total, I think $7 million was spent on gas to mint, those things. It's just absolutely crazy. And then just the gas outprice certain people out of the market for purchasing those things. Like often you spend more on gas than you do on the actual mint price on these things to just be able to kind of get in early and who gets in early is the people who've got access to a bots and infrastructure that allows them to kind of bid at scale. So then what happens is these blocks come in, they buy up the assets and then they sell it on the secondary market, like essentially like siphoning off profits from the artists. But it's tricky. So I don't know that there's a solved problem for this yet. Some other issues is pricing, you know? So like how do you actually know pricing and valuation? How do you know how much this asset is worth? It does make it quite tricky for people to know if they're getting like a good deal or not. There are some projects that are looking to, to solve this problem. I saw this recent one that launched, that allows people to they have to stake some, some ether value and assets, and then the people who are closest to the average price get a reward and the people who were too far off gets slashed. You know, so that's a way to kind of get like a neutral appraisal of an asset. So I think that would be useful in the future. There's other places like NFT bank, who built machine learning algorithms that allow them to, to price these assets. There's Upshot, who's doing quite like some novel crypto economic incentives to, to help enterprise to these assets. So they all people working on that problem, but I think it's always going to be quite tricky and there's always going to be this like super long tail of assets, they just don't have enough trading history for quite a long time to be able to do these accurate pricing models for them. So I think that's tricky and I probably think that's going to remain an issue. I just think it's just inherent in the fact that, like I said earlier, NFTs are just unique digital things. You can imagine somebody came to you and said, well, I've got a like a AI that can determine the price of any random thing. You show it in the real world. I mean, that's going to be quite a tricky problem to solve, you know, in the real world, at least there's like a limit to how many unique things you have, because there's only so much matter that we can turn into unique things. In the digital world, like it can literally be infinite. So, to have like a single way to price, any random, unique digital thing, I think is going to be a really tough ask. But I do think you'll probably have things that are good at pricing specific, you know, like blue chip assets, or probably have like, you'll start developing like a good pricing model around those. So I think that's outstanding problem. Gas fees in general, you know? So at the moment on Ethereum, even on NFTfi for example, it doesn't really make sense to take a loan on anything that's worth investing one ether, just because of the gas costs involved in actually doing these transactions. So, I mean, obviously some of these other chains make it cheaper, like Flow and Solana and so on. So I think that's also kind of like a problem that's being, that's being worked on. What else is the the other thing that's happening quite a lot at the moment is that I saw artists on Behance. So Behance, it's a website where traditional digital artists can just post their body of work so that people can find them so they can get jobs. But people are closing down their Behance accounts because people are stealing those images and then marketing them as if it's their own. You know, so, so there's quite a lot of IP theft going on where these people with expertise on the, like they know how to mint, but they don't know how to make art. And then they go steal art from people who don't know how to mint and they mentored on like a contract and by parcel offers their own work. So, you know, the provenance birds only comes into place once it goes on chain, but what you put into the, the chain, like there's no way to determine the actual provenance of where that came from before it was mentored on a specific contract. So, so that's also a big problem.
Yeah. You know, that reminds that's very reflective of a case before I, I remember Privacy buying a piece of NFT which he thought might be Banksy, it turns out it wasn't, right? So there are a lot of considerations for the NFT world in general, in a way clashes the real world. How do you transfer real identities? How do you make sure that whoever mints it is verified? It's the true creator.
That's the general problem with crypto really. You see all of the things where crypto has really taken off is where things off can just stay in the blockchain and it's fully native. But as soon as you try to tie on chain data to real-world things, that bridge of taking this real world thing into a actual, into the blockchain, that's where that the unsolved problem really is, you know? So like like they say in computer science, garbage in garbage out, right? So, you know, it doesn't matter how good you are at tracing provenance if what you brought in in the first place was stolen from somewhere else.
Yeah, no, it's quite interesting today's topic. You know, we talk about NFTfi, but we are actually also exploring the forward-thinking issues with the NFT industry as a whole. Like you mentioned, there are a lot of things right? In the future, you know, like you mentioned, you can always look at the contracts, but often people still get scammed with NFTs in general, you know? So how would you spot a fake or fraudulent NFT?
Yeah. So I think there's two parts of that problem is like how, you know, like if this was a, so for example, is this a fake Crypto Punk or is it a fake Bored Ape and with that, you know, buy from like a reputable source. So, you know, like if you're buying an OpenSea check for the Blue Tick mark that they've got on there. You're normally safe if you do that. That's the one thing you can, if you do your research and you'd go find like the actual original project, ask them what the contract address was, check that that's the contract address that you're, that you're buying from. So in general, if you just take a few minutes to, double-check what you're buying for things that are already on chain, that's relatively easy for this other problem that we talked about of, you know, is this actually the artist's real work that they minted. That's a harder problem to solve. I mean, you can do a Google image search, you know, take the actual like the, the jet, you know, right there, you can save the JPEG, put it into Google image search, see where that comes from and see if that's the same person. And if you, if you really want to double check, try contact the artists that originally posted this thing online and say: hey, are you actually minting on like this thing as an NFT? But that's a much, much more difficult thing to do. It's much harder to resolve. So for me, for example, I've been following a bunch of artists on Instagram for a very long time. And you know, like years back before, NFTs were a thing. And a lot of them are now starting to mint their actual artwork. So, so if I'm buying something, often it's somebody who I already knew you as an artist before they actually started minting things as NFT. So in that way, I'm relatively safe because I had a preexisting relationship with this person, and I know that like this thing is coming from them. So, so that's kind of one of my filters but it's quite tricky. It's, it's really hard. That's quite a hard problem to solve. I'm sure over time, like these minting platforms will probably start doing some of these checks. It is relatively easy to do an image search and look and see if there's duplicates. So I think over time the should get better and there should be more tools to be able to see these things. But yeah, there's not an easy answer to unfortunately.
Yeah. I mean, it falls on the nature of crypto, right? We are decentralized. And with that, there's a lot of issues with enforcement, IP laws, et cetera, et cetera. Ultimately, it's, there's always an element of trust, right? An element of faith, regardless of whatever we buy.
Yeah. I know. So I also think that there in general, there's a different philosophy around buying things in these decentralized networks. And, you know, if you're buying from a centralized entity, the deal basically is I'm paying you a bunch of commission because I'm trusting you to do all my research for me. And your job is to keep me safe. I can just buy and sell, you know, without having to worry. If you want to buy in this decentralized world, it means you catch a lot more of the value and the artists have a lot more value, but there's nobody there who's checking to make sure that everything is okay. So do you have more responsibility to make your own good decisions. So it's, you know, it's the difference between going to a entertainment like park, you know, like Disneyland, where you get on a ride that feels dangerous, but it's not really dangerous and going to go climb a mountain. Like if you, in your life, you go to Disneyland, you can trust. If I sit where I'm supposed to sit and put my seatbelt on, I will be safe. If you go climb a mountain, you need to make sure that you know what you're doing and that, you know, like that you're not climbing outside of your skill levels, and you know how to check the conditions and like the responsibility shifts to you to make sure that you're safe.
Uh, yeah, I really liked the analogy and there was all of that, that way. I was actually thinking, you know, it's the cost of the babysitter? Do you want to pay for the babysitter or not? Hahaha.
Yes. I mean and I think that is a valid case. So like, I think, you know, so Coinbase, you know, they're releasing their NFT platform, which is going to be in decentralized entity. OpenSea really is also a centralized entity. So I do actually think that they've got like a fair amount of responsibility to make sure the things listed there are actually legit because they are a centralized entity that takes a huge cut of the fees like as part of this part of their platform. So they should make sure that things are safe. And, and I think Coinbase will also be the same, you know, for something like Rarible, you know, which is just an open protocol. They don't really have all that much control about what gets put on there and what doesn't get put on there. So it's not like, I think it's a different value proposition and you need to go to the place where you think that fits your skill level and, you know, do your own research, you know, that's, that's how I see it.
Ben [00:42:51] :
Yeah. And on that note, right. We always hear that advice: do your own research. And for the NFT space or in crypto in general, really, it's very intimidating. So for NFTs in particular, what kind of advice you have for budding collectors?
Yeah. So I think there's, again, depends what you're doing. Are you collecting art or are you collecting collectibles? There's differences there. So for collectible, a lot of what I'll be looking at is who the team that are building this, how healthy is their Discord? What's happening in there? Do all other people building stuff on top of the platform? Do they have a proven track record of being able to execute? So, you know like for Bored Apes, for example, it's clear that they going to be doing cool stuff for people who own Bored Apes, because they've done it and they're going to, they've got a good roadmap and like, they keep adding more value and you can see that there's like momentum there and like a highly competent team that are like building like this ecosystem around the actual project. If you're buying something from Larva Labs, you know, like they have a very different style to the Bored Apes because, you know, Larva Labs is much more around putting something out there and not fiddling with it. So, so like, you can almost think of like, like Larva Labs as like the Bitcoin of NFTs and Bored Apes as the Ethereum. So like Bored Apes are they doing new stuff? They're trying to build things, which is awesome, which kind of creates new value, but they could do something stupid that they like crashes the value of the actual asset. With cryptoCrypto Punks they basically do nothing. They'll do high quality like artwork. You know, they usually almost all of their projects are new and first to do something. And then they just leave it and they don't fiddle with it. So they're not like holding more value on top of it, but at least, you know, that they're not going to do something stupid that's going to take the value down. So you need to understand that you need to send the ethos of the thing. We need to understand, like who the people are behind it to look at like how healthy the ecosystem is. Like, what are the future plans? Do you believe that they're actually going to do those things? And it does what they do resonate with you. Right? So if you're not the kind of person who wants to go to yacht parties and like go to exclusive concerts with like rap stars, then why do you own a Bored Ape, right? Like maybe you want something else. You know, so you need to also kind of line out what you want with these actual assets. On the art side, again, it's I think a lot of the things that make art valuable in traditional world is going to be what makes art valuable on the blockchain. So, and those are things like, is it a historically significant piece? You know? So when you, when you learn art history, you always learn about the first person to do a specific thing that started a new movement, right? They might not always be the best in the thing, but at least the first one will always valuable, and then also the best will be valuable, right? And then if you've got specific artists that like are bought, have multiple movements and they were like one of the, like the prominent figures in multiple movements, their artwork is also going to like retain more value. There is a strong correlation between like how good something is as a visual or conceptual piece of art and the actual value. So like a good example of this is Deafbeef. So he makes these NFTs that are the audio NFT. Fully program, the program that produces the audio isn't written in C and that's what's uploaded to the blockchain. So he was like, one of the first people to do that, was one of the first people to do audio NFTs. He does like, he has these novel mechanisms in it where like each time the asset gets transferred, it degrades. So he's actually doing interesting new work that couldn't have existed if the blockchain didn't exist, you know? So, so that means it's like actually a novel piece of work. He's not just taking something you could have done without the blockchain and sticking it on the blockchain. Like the blockchain is part of the actual artwork. So those things become like they become useful and interesting for like Fidenza, for example, on Art Blocks. So the Fidenza project, there were lots of Art Block projects before, and there's been lots of Art Block projects after, like why is the Fidenza so valuable? Each one of those Fidenzas are visually very strong artworks on their own. You can see a FIdenza is a Fidenza, but they look completely different, but you know, so like you get those ones that are super small and swirly, and then you get very monochrome, big ones. So they all work visually. They all look like they're part of the same family, but they're all very distinct between each other. And the artist has a history of doing like generative art before Art Blocks was the thing, right? So all of those things add up to a super high quality project. Traditional collectors and museums and people who really are buying the art, because I think it's a visually compelling like thing are all going to gravitate to those kinds of things, those assets, and they're going to stand out and over the long run, they're going to bubble up. So it's complicated and you need to pick your niche and in apply the same rules to everything, but it is possible to at least have a better chance of guessing that something is going to be valuable in the future. It doesn't mean that you're always right. You know, sometimes your taste is not going to be something that becomes popular, you know, so even in the traditional art rule, there is also, there are these tastemakers, like who are the big collectors? Which museums are buying it? Was this auctioned off at Sotheby's? And you know, all of those things are like a little bit of like extra marks of approval to kind of like push something towards becoming valuable over time.
Right. I think there was a lot of info to digest there, but hopefully with everyone listening, you know, because of tips and tricks.
Yeah, I wish it was like an easy answer to say. I mean like, like the simple thing that everybody can do though, is like, look at the project on OpenSea, how many owners are there? like what's the total traded volume? Look at the full price compared to recent sales. Like, you know, sometimes you'll have a full price of 50 ether, but something has never been sold for more than two. So, you know, you need to kind of look at those kinds of things too. But all that tells you is like, what are the current market conditions? And sometimes that's to do with how good are these people at marketing stuff. It's also quite easy to do wash trades where, you know, like an artist can just buy something from himself, from a new wallet that he set up to kind of create a high price. So, you know, you need to be careful, but at least that'll give you some kind of indication. Something's done like a hundred ether of trading volume and like has shown us like a strong kind of secondary market and a growth in prices. You know, that's also a way to look at it, but, you know, I think you need to also layer on this kind of like, is this a good piece of artwork? And for that you need domain expertise. There's not an easy way to just like, guess those things you need to build those skills into. Go read some odd books, look at traditional artwork, understand why those things were valuable and why they were considered good and try apply some of those skills to evaluating an NFT.
Right pulling back, right? We talk a lot about NFTs. We went to composition back to if I, right? So I guess we cover a little bit on why NFTs have value and you know, some advice on how we can actually capture that opportunities in this space to capitalize on the value. With that being said, this is why NFTfi has a place. NFTfi offers NFT collectors who based on all the points that you raised before big collectors who may want to become more liquid and collateralize your NFTs, they can take advantage of the platform. So, you know, this is kind of, I've kept stating why platforms like NFTfi are important for NFT collectors and industry as a whole. That being said, what are the plans of NFTfi in the future?
Yeah. So we are pushing out version two of our protocol in Q1 next year (2022). So to give a little bit of context, when we launched NFTfi, we started developing this in January, 2020. At that stage, you could buy a Crypto Punk for less than one ether. You can buy an Autoglyph for one and a half ether. The Beeple sale hadn't happened, Bored Apes, hadn't exist. No celebrities owned any NFTs, you know? So, so when we launched really what we knew all of the kind of NFT collector OGs. We knew that at least for some of them, this would be, be a useful project, but we didn't know when the rest of the world would kind of kick in. And, you know, like if, if you spoke to anybody in NFTs at that time and you told them. You know, 18 months from now, you're going to have NFTs selling for $70 million, jay-Z is going to have a Crypto Punk as his profile, OpenSea would have done $2 - $3 billion in one month in volume, nobody would have believed you. So really what we built was a, it was really an MVP. It was the simplest contract we can make with the simplest UI to kind of get the core value proposition of being able to get a loan on your actual NFT. Since then, obviously the market it's really kind of like shown that this is an actual thing. We, we just crossed $35 million in loan volume. Like our largest loan was $1.4 million on an Autoglyph. You know, so, so there's clearly a market here. So what we're doing now with version two is retaking this kind of very simple kind of single-focused single smart contract and kind of expanded that into be a modular system that allows us to do multiple types of NFT agreements across multiple NFT standards, and like made us easily upgradeable and governable by a DAO, which is kind of our plan. We are going to be aggressively decentralized to go from, you know, we've raised some VC funding now that's going to fund like our kind of internal development process. But over time we want to kind of move this into an actual DAO. And the protocol now has become a more like generalized NFT agreement protocol, but the focus is still on loans in the kind of short term. So that's one thing that we've done in in version two is kind of like lay the foundation for future growth and expansion of the actual protocol. But on top of that, we've also, you know, obviously we've had two and a half thousand loans. We've got a significant user base who are very engaged in helping us politely suggesting things that we should do to improve, hahaha improve the protocols. At the moment we only support ERC-721, we'll support ERC-1155.
So that's going to be good. The other thing, there's a new standard called ERC-998, and ERC-998 allows you to bundle up a number of NFTs in a new NFT. So it's essentially an NFT that can own other NFTs. So we've, we've implemented the ERC-998 standard, which will allow people to create bundles so that if you need a big loan and you don't have a single asset that's worth that much, you can bundle them together into a single NFT and that NFT is then what you kind of use to actually do the loan on. So bundles are coming.
At the moment, what we do is we've got very short loan periods, mainly just because we kind of, again, we don't know what the market is going to be like. We want to kind of limited people's risks. We knew we were going to do V2, so we didn't want them to have long loans, kind of stuck on the first version of the contract. But now with V2, we're going to have unlimited loan periods. So you can decide how long you want to have the loan on. At the moment, the max is 90 days. The other thing we're doing is prolox the loan. So if you pay at the moment, you pay the full amount no matter when you repay the loan we now allow you to do a longer period loan, but then if you repay early, you only pay interest on the period during which you actually mint the actual asset, the actual money. Sorry. Another big thing that we, that we adding in is known extensions and renegotiations. So that allows you to, like, I thought I wanted a 30 day loan. I'm not actually getting to make my repayments. You can renegotiate with the, with the lender and extend that loan period for potentially an additional fee. And you can also even do that after the loan has expired. So if you miss your repayments and you really don't want to lose those assets, you can contact the lender and say: I know I'm late, but you know, can you please extend this, I'll pay you some extra to do that. So I think that's very important for people who've got an emotional connection with, with the assets to be able to get them back. So, one thing that's kind of unique that in our platform, which kind of talks to like how NFTs can really be anything is when we do a loan in V1, say I'm the borrower and you're the lender. You get an NFT that represents the loan. And whoever owns that NFT is the person that gets the repayment amount. So if you took out the loan and you need the capital back, because you'd need that in something else, and you can sell your promissory note to somebody else and then they take over the loan from you essentially. And in V2, we would also have a receipt. So me as a borrower, I would also get a receipt saying, Hey, I owed this money and if I repay it, I'll get back this NFT. So now in V2, if I then see, I'm not going to actually going to make this, I'm only be able to repay it. But my loan is for half the value of the, what the NFT is right now, I can sell my loan to somebody else, get back a little bit of extra and then they can take over the actual loan from you. So now the actual components of our loan are actual NFTs that can allow people to bold other protocols on top of us.
Yeah. I mean, a lot of exciting stuff, right? Anyone who is interested in NFTs, big collectors out there who are interested in becoming more liquid, you should definitely check NFTfi out, especially in Q1 next year, right? For V2.
And I think that's about it for today's session. Thank you so much, Stephen, for coming on board. Thank you so much for sharing a little bit about your protocol, you know, explaining why the NFT space where the value comes from and how NFTfi can contribute to the space. Thank you so much.
My pleasure. Thank you.
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