NFTfi is the largest trustless decentralized peer-to-peer liquidity protocol in the NFT space. They are a community-owned and community-governed platform with the goal of becoming the main settlement layer for all NFT lending. On the platform, NFT collectors can collateralize their NFTs to receive short and long-term cryptocurrency loans from peer lenders. Recently they have implemented a new feature with Gnosis Safe to allow borrowers to access and use NFTs held in escrow. Their NFT bundle feature provides opportunities for diversification of risk, meeting the needs of small mixed portfolios and streamlined functionally for high-net-worth collectors. Through strategic partnerships like NFT Bank, NFTfi is integrating its lending feature on other major NFT hubs to allow direct loan access and reach mainstream adoption.
Steven Young, Founder and CEO of NFTfi joined us for an AMA on September 22nd.
vVv: Can you give us the elevator pitch of what you guys do and what are your respective roles at NFTfi?
Steven: My name is Steven Young, I’m the Co-Founder and CEO of NFTfi. We had the idea for NFTfi late in 2019 and started working on it in January 2020. We went live in June 2020 and completed $300,000 in loans during the first year. In our second year, 2021, we did $14 million. To date for 2022, we have done $250 million.
The way our system works is that you can use your NFTs as collateral to get a cryptocurrency loan. You list your NFT on our platform, and lenders will then make you offers with loan terms, such as principal loan duration, and interest rate. Once you accept those terms, your asset is held in escrow so that both the borrower and the lender know that it’s safe for the duration of the loan. As the borrower, you get the loan period to repay the actual loan principal plus interest. If you repay, you get your NFT returned. If you don’t repay, you retain the original amount you borrowed but the lender keeps the NFT.
vVv: And all of this is performed in a 100% trustless manner?
Steven: That’s correct. Execution of the loan is fully on-chain. Moving the money from the lender to the borrower, and the NFT into escrows occurs in a single transaction. And then the NFT is held inside of our smart contract for the duration of your loan.
vVv: What are some of the trends that you’ve seen recently?
Steven: The volume on NFTfi is down, but the decrease is less than the volume on OpenSea. That shows the resiliency in loan demand, even during a down market trend. Actually, a lot of people are using loans as downside protection in case the market drops. People will take out a loan at 70% of an NFT’s valuation and if the NFT market value declines below this, they don’t repay the loan. They’ve essentially set a stop loss for their NFT collection.
The other thing that has been very interesting for us has been how low the default rates have been on CryptoPunks and Bored Apes. Both of them are still below 5%, even after the recent large drop in prices. And we’re even seeing people pay back loans where the NFT is worth less than the loan. Largely, due to emotional attachment to those NFTs.
The other thing we’ve observed is the sudden increase of loans on generative art and autographs. Thus, some of the volume is moving away from PFPs, although they still remain dominant.
We’re also seeing steady growth in users and API lenders. If you list a bluechip NFT, you’ll often get offers in less than 10 seconds. For this class, there’s very a quick turnaround.
vVv: What’s the average interest rate lenders earn on your platform?
Steven: It depends a lot on the collection. For CryptoPunks, it’s between 10-11% APR. Bored Apes are about 20-30% APR. And some of the more risky assets are 60% plus APR.
vVv: How many collections have you listed on NFTfi and what are the criteria to list one?
Steven: We have about 260 collections listed so far. The minimum loan amount with gas costs at the moment is about $500. We ensure that the assets are worth enough prior to performing loans. We also review if there is sufficient secondary market volume so if there are defaults, people can liquidate assets. The volume also indicates how big a particular community is. If we receive requests from our community to approve a certain collection, we’ll bump it to the top of the list.
vVv: What’s the term duration for loans offered?
Steven: The most common ones are around 30 days. We also see a lot of short-duration loans, 1-7 days, where people have a short-term need for capital. In comparison, 90-180 day loans are less common. This is attributed to the increased risk for long holdings of a volatile asset class.
vVv: The last time we spoke, NFTfi was the biggest lending platform in the NFT space. Does it still hold true?
Steven: Yes, we still do the majority of the NFT loan volume on a daily basis. Bend DAO has picked up quite a lot. However, they’ve had lots of issues around defaults and liquidity with the market going down.
vVv: How do you compare yourself to other lending platforms?
Steven: We’ve been around the longest. We’ve got the deepest liquidity. We’ve done almost 18,000 loans. In essence, we are the most trusted and our contracts have been the most battle-tested. And compared to other peer-to-pool protocols, they often offer variable interest and variable duration, and we offer fixed interest. We are exploring variable duration loans in the near future. And what that means is with our loans, you always know when your loan is actually due. There are no auto liquidations that can get triggered by some kind of drop in the market where you suddenly have to repay immediately or you lose the asset. You always have the full loan duration to decide whether to repay or not, depending on your situation and market conditions.
”In essence, we are the most trusted and our contracts have been the most battle-tested.
There are no auto liquidations that can get triggered by some kind of drop in the market
vVv: Have you rolled out the bundles feature?
Steven: Bundles are in development at the moment. It should be released sometime in the next three to five weeks, depending on how the testing performs.
vVv: And what’s your business model at the moment?
Steven: We take 5% of the interest earned by the lender, so borrowers don’t pay anything.
vVv: How do you see that in terms of transitioning into a self-sustaining business model?
Steven: In the long run, there’s probably room to increase that fee a little bit. But we’re still in the growth stage and capturing market share is the most important thing. We’re not overly optimizing to try to extract the most value at the moment. Our main focus is to grow our community and network as big as possible. And we don’t want fees to be the main barrier to onboarding users.
Our opinion is that the NFT market is going to be massive in the future and as a result a lot of lending activity. In such a case, a massive fee is not required to have a sustainable business. In 5-10 years, the market is going to be orders of magnitude bigger than it is now and the loan volumes on lending platforms are going to be scaled proportionately.
vVv: What are your plans for distributing an NFTfi token? And what is the use of the token within your ecosystem?
Steven: With the market conditions, now is the absolute best timing. But it’s definitely on our roadmap, as it’s very important for us to have a community-owned platform. We want to ensure that we do it right the first time.
vVv: Are there other projects other than Meta Street which are building on top of NFTfi?
Steven: There are quite a few. One of them is a DAO called Goblin Sack, which has an API that provides instant liquidity. They have bots that actively work and lend on our platform. They act as liquidity providers but are also building additional products on top of us. In addition, we are speaking to another organization that is looking to potentially build an options protocol on top of NFTfi that would allow lenders to essentially take out insurance on defaults on the actual loans, which allows higher APR loans. Many lenders are integrating with us directly. From NFT bank’s own app you can signup for a loan from NFTfi, where they act as the lender. And we saw a really cool project at a recent NFT financialization hackathon. It was a lending club that allowed people to pool capital together and then execute loans.
vVv: What challenges do you see in general when it comes to lending and borrowing with NFTs?
Steven: Pricing is extremely difficult, which is part of the reason why we follow a peer-to-peer model. We rely on the lenders to determine pricing. In the long run, as a result of the great variety of NFT types, there will be a specialization in lenders for different areas, projects, and verticals to better assess asset values and offer better terms. And we want to provide the mechanism for people to be able to compete and find the best prices. The Illiquidity issues surrounding NFTs as recently seen with BendDAO auctions is a growing concern that will become more problematic as time goes on which is part of the reason we choose a peer-to-peer model.
vVv: Which chains do you currently support?
Steven: At the moment, we’re only on Ethereum mainnet. We’re launching on flow sometime soon. And we’re actively evaluating other altitudes, just to see if there are any growing sustainable communities developing.
vVv: What’s your personal background Steven, and how did you manage to build the world’s largest NFT lending platform?
Steven: When I was in high school, there were two subjects that I really enjoyed, computer science and art. And actually, the way I was exposed to computer programming was a program called Logo. It was this little turtle that you could program to move across the screen. And it essentially was a kind of generative arts generation tool that was used to teach kids how to program. So my first exposure to programming really was generative art. And then when I left high school, I had to decide between art and programming and started to do programming because it was 1998. And everyone was getting rich just before the Dot-com implosion. Then I ended up spending the next 20 years or so, building software, mainly in banks, asset managers, fintech, long-term insurance. But in the meantime, I’ve been doing art on the side, painting, drawing some generative art as well. And then in 2016, I got super deep into crypto. I left my job of being a safe asset manager to find an exchange in 2018. When I left there, I took a little time off and then ended up in the NFT space. NFTs really allowed me to combine the three things that I knew the best: programming, finance, and art. It really was the perfect storm for me.
vVv: How did you go about finding the right team members for your venture?
Steven: Initially, it was me and one other Co-Founder who were building the core of the platform. Once we started getting some traction and raised our first pre-seed round, I had a list of people that I’ve worked with over the last 20 years that I wanted to work with again. Our CTO, designer, and front-end developers are all people that I’ve worked with in the past. Jonathan, my other co-founder, met through token engineering. He was actually an initial angel for NFTfi. And then I really liked the way that he worked and spent the next nine months trying to convince him to leave his other gig to come to join us. For other hires, we work with a headhunting agency.
vVv: How much money did you need to raise to get off the ground? Or did you get the platform up and running before you even started to raise?
Steven: I was taking some time off, so I had some spare time. And then the lockdowns happened. Basically, we were sitting inside the house for 3-4 months building it ourselves. After we gained some traction, we began seeing volume and steady monthly growth. Only then did we start to raise capital. By the time we were raising, we were already seeing very strong growth.
vVv: What’s your opinion on raising capital before a company has an actual product?
Steven: It’s a nice luxury to be able to raise before having a product. When we were trying to do this, the NFT ecosystem didn’t really exist, so it would have been very difficult for us to raise in that environment. This was before Bored Apes launched and CryptoPunks were below 1 ETH. At the time, Crypto kitties were the biggest project.
We created the first version and then we started getting traction. It was really just myself working full-time: raising capital, trying to keep the servers up and running, performing bug fixes, product support, growing the community, and handling Twitter. If we had capital before launching, we could have had a bigger team in place. If you can raise some capital before you have a product that’s great. But I would caution you to keep the team super lean until you’ve achieved product market fit because you can’t estimate that time scale and you don’t want to run out of runway.
vVv: How do you avoid making a scam collection accessible through NFTfi potentially letting people take out loans on the wrong project?
Steven: That’s part of the reason we have an approval process. First, there’s no cost for us to approve a project. Part of the reason we have qualifying criteria is that it makes it less likely that it’s a rug project. And then we do due diligence on every one of those projects before we approve them to ensure that it is actually the correct smart contract address, project legitimacy and that there’s a real community that will generate secondary sales volume.
”Part of the reason we have qualifying criteria is that it makes it less likely that it's a rug project. And then we do due diligence on every one of those projects before we approve
vVv: NFT bundles allow risk diversification. If the floor of the involved collection tanks, the bundle might still have enough value for the borrower to repay the loan. Which implications do you see regarding this? Are you expecting a higher loan volume?
Steven: Yes, I do think that bundles do a few things and risk reduction is one of them. You can spread the risk because it’s a number of different assets. Also, say you have 10 or 20 assets that individually aren’t worth all that much, you can now bundle them together and get a single loan. Bundling, in this case, allows gas costs to become a smaller portion of the loan costs. This opens the door for very big loans. We’ve had a couple of lenders using 100+ CryptoPunks to do loans totaling more than $8 million each, but they were actually made up of a bunch of individual loans from individual banks. I think we will see smaller loans, comprised of lower value assets, more mixed bundles, and then bigger loans because they are logistically easier to bundle together.
vVv: Is there a contingency plan for the event in which an NFT drops in value below the loan amount to stop the borrower from keeping the loan and leaving the lender stuck with the NFT?
Steven: No, that is part of the risk that the lender assumes, and it’s also what earns them their APR. As a lender, you need to be comfortable with the possibility of taking ownership of the asset. To be honest, a lot of lenders like defaults, because they have liquidation strategies that actually potentially end up being more profitable than the actual loan. A lot of them will hold the asset until the price recovers or if they’re part of a DAO, the DAO automatically purchases the asset from them. I do think getting defaults and being able to liquidate those assets should be part of the plan of any lender. Lenders should include in their risk calculation, that notion that borrowers might not repay the loan if the asset is worth less than the actual loan principal.
vVv: What does NFTfi look like in two years? What are the team’s plans to keep on top of the crypto landscape, regardless of sentiment?
Steven: For us, it’s really important to be the top settlement layer for anything loans related in the NFT world. We would be focused around optimizing the borrower experience, ensuring that it’s super easy for them. We’re looking at ways to do instant liquidity, so you don’t have to wait for offers. We are also looking at other types of loans to give borrowers more flexibility in the type of agreements. As I said previously, there are many other projects building on top of us. In two years, hopefully, loans are just one of the things that you can do using NFTfi as the actual underlying settlement layer. We’re working really hard on partnerships. Background integrations like what we are doing with NFT bank, and a few other projects. These integrations are at places where you are already using your NFTs, and where you will be able now to receive a direct loan. The core mission for us is enabling decentralized NFT financialization, and being at the forefront of that.
”The core mission for us is enabling decentralized NFT financialization, and being at the forefront of that.
vVv: How do you ensure customers using NFTfi have a positive experience and keep coming back? The volatility of NFTs and ETH prices means that a lot of people are likely to be making bad trades. Do you include customer education to make sound financial decisions as a goal of NFTfi?
Steven: Yeah, this is something that we are spending a lot of time talking about internally. We definitely think education is very, very important. And especially like you said, leverage is risky behavior that you need to be able to do in a safe manner that fits your financial goals. Andre from our team is pioneering that whole effort. We are looking at how to educate people and make sure they stay safe. How do we help them understand what strategies they have and what are risks involved there.
I come from a traditional retail asset management background, and a large portion of what we were trying to do is to make sure that investors actually understood the products that they were buying. A lot of the bad financial decisions are made because they didn’t understand the product they were buying. And that causes really bad outcomes for everyone in the long run. And, this is the same with us. It is our responsibility to make sure that our users understand what they’re getting into.
”It is our responsibility to make sure that our users understand what they're getting into.
vVv: Do you see any risk for regulators potentially interfering with the overall NFT lending?
Steven: Yes, there’s always a risk with regulators in the crypto space. If you’re a crypto startup, your two biggest risks are getting hacked and the SEC. So it’s something that we are very aware of, and we try to walk on the line of being safer than we need to be. When a regulator is not paying attention to the space, we hope they do eventually, right? Because as soon as it’s big enough to be significant, they’re going to pay attention. And we all want things to be significant in this area that we’re all busy building in so it’s going to come at some point. We are watching the landscape all the time. We have a team of lawyers all over the world, helping us cover all of our different jurisdictions and making sure we stay on top of the developments there. I haven’t heard any rumors of them targeting things like lending directly, but I suspect there are probably quite a few NFT projects that the SEC might scrutinize and ask if they are securities. I suspect over the next 3-4 years, you will see more and more scrutiny there. And we’ll monitor and do whatever we can to stay on the right side of the regulatory line.
vVv: If a collection falls under scrutiny you can simply remove it from your platform, right?
Steven: When it comes to security, and if we need a license to deal with those securities, then we’ll explore that avenue. Our ethos is a community-owned and community-governed protocol. That will never go away but we’ll try to do that in a way that protects our DAO members, team members, investors, and ourselves from going to jail. Because in the long run, that’s in the interest of the project, right? You want to be compliant and coexist in the world with the rest of the financial system and we need that for mainstream adoption.
”Our ethos is a community-owned and community-governed protocol.
You want to be compliant and coexist in the world with the rest of the financial system and we need that for mainstream adoption.
vVv: Many NFT projects use airdrop mechanisms to reward people that hold their NFTs. Since the NFTs on NFTfi are moved to an escrow account, that becomes impossible. Do you see any solution for this?
Steven: We do have a flash claim feature. Recently, we did a press release announcing our partnership with Gnosis Safe. And once that’s complete, instead of the asset being moved into a generic escrow account that mixes all of them together, we will actually deploy a Gnosis Safe wallet for every user who takes out a loan. And then we would actually escrow the assets that are in a safe that they actually own themselves. But we would block the transfer of those assets for the duration of the loan. You will not be able to transfer or sell that asset but you would still be able to sign for it as if you own it. You would still be able to receive airdrops, verify, and login into Discord servers. That’s part of the reason we’ve taken a little bit longer to solve this problem because we really wanted to solve it in a foundational way where it works transparently and is very secure.
vVv: Steve, if there’s anything else you would like to share, say, or ask the community, please feel free to do so.
Steven: I just wanted to thank you. vVv has been such a great supporter of NFTfi. It’s always really interesting to come and speak to the vVv community and answer all their great questions. I really appreciate you guys taking the time to join us.
vVv: My pleasure, Steven, it’s always a pleasure to talk to you. And I’m very excited about the progress you’re making. It’s very obvious that you guys have the right philosophy for what you do. And I’m more bullish now in the bear market. I think NFTfi has a very bright future and I’m very much looking forward to what you are going to pull off in the next few months.