NFTFi
Introduction
Arcade is a NFT-centric peer-to-peer lending platform [1]. Since its early 2022 launch, Arcade has facilitated ~$150M in NFT-backed loans, $27M in TVL, and $14M in active borrowings [2] [3]. Recently, Arcade has introduced V3 of its protocol, and launched ArcadeDAO as a decentralized governance body for the protocol [4]. Within this article, we will provide a brief overview of Arcade’s history, as well as its future potential within the broader NFTFi space.
Development and History
Just as NFTs began to take off in early 2021, Arcade founders Gabe Frank and Robert Masiello recognized the vast potential of providing a new financial infrastructure for this emergent NFT asset class. Despite seeming to appear as nothing more than a few profile pictures at the time, Frank and Masiello recognized that NFTs potentially represented the next evolution of digital assets – not only for digital art and collectibles, but also for real-world assets and goods.
After closing its second round of funding in December 2021, led by Pantera [5], v1 of Arcade Protocol launched in January 2022 [6]. Since then, Arcade has been a pioneer in NFT financialization, including facilitating the first on-chain digital-art bundle loan – an NFT-backed loan of $1.25M USDC in February 2022, with Genesis as the lender [7].
By August 2022, when Arcade Protocol launched Version 2, the protocol had already originated over $15M in total volume [4]. Version 2 introduced more sophisticated features, including the ability for lenders to make loan offers on entire collections [4].
In Q3 of 2023, Arcade had over $100M in total volume processed, and introduced two major upgrades: first, Version 3 of Arcade Protocol was introduced in September 2023, and shortly after in October 2023, the project launched ArcadeDAO, its decentralized on-chain governance body, alongside its governance token [4] [8].
Today, as of November 1, 2023, total volume of the protocol is around $150M. Of this, there has been around $33M in CryptoPunk total loan volume, $14.5 in digital art loan volume, and $2M in real world assets (RWA) and real world goods (RWG) loan volume [3] [9]. For lenders of the platform, they’ve earned around ~$2M in interest with an average APR of 16%. Defaults across the platform also remain low at around ~8% across 3500 loans [3].
NFTFi: From Digital Art to Real World Assets
Notably, Arcade has pioneered loans against blockchain-based RWAs like luxury goods, totaling $2M in loan volume, serving as a proof of concept for the vast potential in physical good collateralized lending via blockchain. For example, in July 7, 2023, Arcade pioneered several loans backed by NFTs representing Rolex watches at over $10k USD – some of the first examples of using a tokenized physical RWA as loan-backing [10].
Arcade has since facilitated on-chain loans over a diverse range of RWA and RWG backing. This includes a $1.1M loan using a collection of shirt wear brand Supreme logo T-shirts that was previously authenticated and appraised by Christie’s [11].
Going forward, Arcade’s team believes that RWA-backed loans will become an increasingly important component of future NFT-based lending activity, both within the Arcade ecosystem and beyond. This is especially true in a climate where the hype around profile-picture based NFTs have simmered down, while at the same time there is increased interest in the use of NFTs to digitally represent RWAs to create novel financial innovations.
As Gabe Frank notes, “collateral lending is overdue for innovation” [9]. Beyond the crypto space, Arcade also represents a concept with much larger potential, combining tokenized assets with on-chain liquidity offer a more modern approach to real-world asset lending. Typical APRs on NFTs on Arcade have averaged between 15-20% APR, a rate that is still significantly lower than traditional private lenders which can charge upwards of 120% APR on collateralized loans [9].
Crucially, as Robert Masiello points out, the value creation of RWA NFTs is not in the “tokenization” itself, but rather in the “financialization” of the tokenized asset, such as the ability to lend and borrow based on these tokenized representations [9]. After all, what’s the point of having a tokenized Rolex if I can’t do anything with it? Moreover, Masiello argues that one of the core values of the crypto space is to provide a much more accessible and sophisticated set of financial tooling than legacy financial solutions [9]. Arcade, aims to position itself at the center of this redefinition of financial tooling, unlocking the liquidity and financial toolbox of the crypto space for a diverse set of real world assets.
Conclusion: Towards a Larger Vision of NFTs
Arcade’s transition from assets backed by digital-art NFTs to real-world assets, such as luxury watches and designer clothing could define a much larger vision of NFTs beyond the traditional idea of profile pictures. In this sense, Arcade’s growth and development over the past few years encapsulates the gradual maturation of the NFT space over the past few years.
What NFTs may provide in the future is a unified framework for both traditional and digital assets, authenticated by public blockchains. In turn, NFTFi represents a novel opportunity to standardize financial processes and instruments across the physical and digital realms. Whether it be a CryptoPunk, a Rolex, or a luxury T-shirt, their tokenized representations can all be used to collateralize loans and in other financial instruments, ultimately leading to greater transparency and accountability across both traditional and digital financial realms, and creating a more efficient and unified method of representing “value” in the digital world.
- Paul Veradittakit
References
[1] https://www.arcade.xyz/how-it-works
[2] Data as of Nov 6, 2023: https://defillama.com/protocol/arcade.xyz
[3] Data as of Nov 6, 2023: https://dune.com/arcade_xyz/arcade-nft-lending
[4] https://medium.com/arcadexyz/arcade-v3-protocol-launch-7a0a37e526a2
[5] https://www.coindesk.com/business/2021/12/22/arcade-raises-15m-to-offer-nft-backed-loans/
[6] https://www.zdnet.com/finance/blockchain/nft-lending-marketplace-arcade-officially-launches-platform-enabling-liquid-lending-markets-for-nfts/
[7] https://fortune.com/2022/02/07/nft-collateral-for-million-dollar-loans/
[8] https://www.cointime.ai/flash-news/nft-lending-protocol-arcade-17708
[9] Some stats and quotes within this article are provided directly by the Arcade team, as of November 2023.
[10] https://decrypt.co/148099/latest-nft-trend-taking-out-loans-rolexes
[11] https://finance.yahoo.com/news/arcade-facilitates-1-1m-loan-041857276.html
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Hi, I’m Paul Veradittakit, a Managing Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. I’ve been in the industry since 2014, and the firm invests in equity, early stage token projects, and liquid cryptocurrencies on exchanges. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.