NFTs, or non-fungible tokens, are perhaps the most broadly defined and misunderstood form of a digital asset. Whether it's a digital artwork or a tokenized deed to a plot of land, NFTs have been called many things by many people, often lumped with cryptocurrencies and labeled as "funny money." But one Silicon Valley-based start-up is taking the potential value of NFTs seriously by creating a peer-to-peer marketplace and lending platform that enables the financialization of these unique tokens.
Arcade, a DeFi marketplace and lending platform for loans backed by NFTs, officially launched today to the public, enabling NFT owners -- from novice to high-net-worth -- the ability to unlock liquidity on one or more of their NFTs on the Ethereum blockchain; providing the means for lenders and borrowers to come together to turn NFT holdings into liquid assets. According to the company's announcement today, lenders that hold stablecoin or ERC 20 tokens can participate in a new source of decentralized finance yield by underwriting fixed-rate term loans collateralized by borrowers' NFTs. Arcade's platform uses a smart contract protocol called Pawn Protocol to escrow high-value assets on the Ethereum blockchain.
Last December, ZDNet reported that Arcade raised $15 million in Series A funding to further develop its institutional over-the-counter (OTC) trading desk, which independently appraises, validates and curates NFT collections for institutions decentralized autonomous organizations (or DAOs) and high-net-worth collectors. According to Arcade, this OTC desk arranges high-value loans using a combination of machine learning and social sentiment analysis to appraise NFTs. "Up until now, we've been operating an OTC desk that provides white-glove service to both borrower and lender, helping them determine and appraisals," said Arcade CEO and co-founder Gabe Frank.
Since its launch in 2020, Arcade has been in private release, available only to wealthy NFT owners, institutions and DAOs, with the protocol holding more than $15 million in so-called "blue chip" NFTs locked in escrow and $6 million of loan volume. "By opening up to the public, they don't need to go to that 'white-glove' service but rather can just meet on the marketplace by connecting their web3 wallets and requesting loans and then seeing if lenders on the other side fill the loan in the marketplace," Frank told ZDNet.
As Arcade makes its platform available to a wider client base, it will also see smaller-sized loans but a wider variety of NFTs. "The average loan size now has been about $350,000, but we think we'll start to see smaller loans of about $5,000 to $10,000 against different collections, not just high-value CryptoPunks and art pieces, but maybe some gaming assets and other [pricier] NFTs, not long tail assets," Frank said.
Concurrently with the official launch of Arcade, the company announced that it coordinated a $1.25 million on-chain NFT-backed art basket loan funded by digital currency prime broker Genesis for cryptocurrency art collector Chris Ciobanica, known by many in crypto circles as Silver Surfer.
With more attention building up in the NFT marketplace, more assets are coming in, with celebrities providing the catalyst for the NFT craze. "More assets are coming into the space, and now you're seeing famous people -- from movie stars and producers to various mainstream artists -- starting to move their IPs to the blockchain via NFTs. So, the market is at around $40 billion now, but as a whole, we think it'll be in the trillions… probably in the next three to five years once the Metaverse starts getting built out, as NFTs are the assets inside a metaverse" Frank says. "When that economy grows, then the loan market will grow exponentially," he added.
As the NFT marketplace grows, so too are the number of people interested in participating. But for those not properly familiar with the workings of NFTs and investing in them, how does one get started? Frank recommends getting educated first by joining a discord -- or online hangout -- where one can talk to a community and ask questions. Frank also recommends following software and gaming developers on Twitter to see news and participate in discussions.
Ultimately, it comes down to first-hand experience. "Buy something you like and that you enjoy, whether it's an art piece or collectible because right now they're all just speculative assets. It's about being involved in the community," Frank added.