The NFT Liquidity Machine
In October of 2021, Richerd Chan, co-founder of the NFT company Manifold, was offered 2,500 ETH for his NFT CryptoPunk #6046. If he accepted the bid, he'd receive $9.5 million. But he ignored it, saying that his CryptoPunk, which has 3D glasses and a cigarette, was not for sale.
The astonishing offer was made by a crypto company after Chan repeatedly insisted on Twitter that he would not sell his NFT, which he bought for $83,000, at any price. The offer may have been a publicity stunt, but it was on the blockchain; it was real. For Chan, though, owning the NFT was more important.
But what if Chan—and other people with valuable NFTs—could keep their CryptoPunks and Bored Apes and Squiggles while also tapping into their financial value?
This is what Joe Delong and Justin Bram want to unlock for NFT owners with Astaria, their NFT lending platform that's slated to launch within the next month or two.
Delong and Bram refer to Astaria as a NFT liquidity machine, because it will offer anyone with a NFT the option to (instantly!) get a loan. The NFT will be collateral for this liquidity, which they can put to more productive use. But the NFT is still theirs to hold and use during the loan period.
"A lot of people who hold Apes are NFT-rich and cash-poor, and we want to fix that," DeLong told Axios when they raised funding back in June. But their ambitions are bigger than that.
Even during this bear market, developers and founders are coming up with new use cases for nonfungible assets, and Astaria, who we're proud to call one of our customers, is an example of this optimistic innovation.
Astaria is not the first company to offer NFT-backed loans. There are two existing approaches, but both have drawbacks.
NFTfi exemplifies a peer to peer model. Anyone with a NFT can list it on the platform, and other NFTfi users who want to lend can propose and negotiate terms of a loan. Once both sides agree, they enter into a smart contract that sends cryptocurrency to the NFT owner.
For borrowers, the process offers a custom loan. But it takes time; it's not instant.
Delong calls this—providing instant, highly liquid loans for NFTs—the hardest problem in DeFi.
In his words: "Any viable lending solution should allow borrowers to access instantly liquid and accurate lending terms for their NFTs."
Services like JPEG'd offer a peer to pool model. JPEG'd offers instant loans, but there's a catch. To do it, lenders offer terms for NFTs from collections like Bored Apes and Squiggles. It's a standing offer—anyone with a Bored Ape or Squiggle can get liquidity with a few clicks.
But what if you have a rare Bored Ape with highly coveted blue laser-beam eyes?
In that case, you're leaving money on the table. Since lenders offer identical terms for any NFT in a given collection, the loan size and interest rate are based on the value of the collection's "floor piece," meaning the NFT with the lowest value.
"You get instant liquidity, but no one's getting custom appraisals or custom valuations," Bram explained to us. "So we think this is pretty inefficient."
To get borrowers instant offers that are also customized and competitive, Bram and Delong are building Astaria, a lending platform based on what they call a three-actor model.
Astaria has lenders and borrowers. The new, third group is strategists who appraise each and every NFT in a collection and suggest unique loan terms for each one.
These strategists, which are companies like Upshot and DeepNFTValue, evaluate NFTs based on data such as sale history, bids, and mints. And they don't just propose loan terms—they package them up in "vaults." One vault could be every Squiggle; another could be a selection of low-risk NFTs whose value has been stable. Lenders can then choose to invest in vaults, making their capital available to anyone with a NFT in the vault that seeks out and accepts the relevant loan.
(We're curious to see at launch how the strategists choose to package and name their vaults. Personally, we'd call a vault of Bored Apes "Go Bananas!")
Thanks to this three-actor model, NFT owners seeking liquidity can get loans instantly, since approved terms are listed on Astaria. But the loans are also custom (based on the NFTs value and features) and competitive (multiple strategists may write terms for a single NFT, so borrowers can shop between offers). This new model may very well solve the hardest problem in DeFi.
As they built Astaria, Bram, Delong, and their team had to solve many technical challenges. At Center, we provide NFT infrastructure for crypto companies, and our solutions are some of the gears and pulleys in their NFT liquidity machine.
To see them at work, let's walk through a few cases of the user experience.
When a user opens the Astaria platform, they'll see their wallet and the loans that apply to their NFTs. To set this up, Astaria can't simply ping the user's wallet to ask which NFTs they own—the blockchain isn't a spreadsheet that lists who owns what; it's a list of transactions organized by time. So Astaria uses Center's API, which indexes the blockchain to determine which NFTs that user owns.
That list of NFTs, though, often includes spam NFTs, which are unsolicited (and usually unwanted) NFTs, typically sent by creators to promote a new collection. (Like with spam mail, these creators take advantage of how crypto addresses, like mailboxes, can't block incoming tokens.) To keep this spam from appearing on Astaria, the Center API makes it easy to exclude low-quality NFTs based on more than a dozen tried-and-tested heuristics.
"We didn't want to build the service ourselves to call all the NFT data that you guys at Center have worked so hard to build," says Delong. "Working with Center gave us an opportunity to skip building all of that in-house so we could focus on the hard problems."
Another use case: a lender perusing the various vaults on Astaria where they could invest their money. Showing them the JPEGs of a vault's NFTs, rather than just a list of names, requires using the NFTs metadata to render the image.
This is trickier than it sounds. You need to build something that can identify the right URL from the blockchain, retrieve the media, figure out the image's size, and display it on your site—all while accounting for the two existing standards for NFTs and making sure the URL doesn't link to a virus.
Astaria could have simplified the task by whitelisting a limited number of popular NFTs supported on the platform. But the team didn't want that limitation.
"So, we had to find a way to display all of the NFTs in existence," says Delong. To do that, they turned to Center's API.
Rendering NFTs is important for other parts of the platform, too. It allows borrowers to literally see the NFTs in their wallet. And when a borrower does default on a loan—either because they failed to pay the interest payments, or because a drop in the NFT's value means it can no longer serve as collateral for the loan—the NFT goes up for auction on Astaria, with Center's API making sure the image renders on the auction page.
One way to think about Astaria is that it's like art lenders who offer loans and accept Picasso paintings, Ming Dynasty vases, and other fine art as collateral.
But you could compare Astaria to a much bigger category: the entire market for asset-backed loans, which includes mortgage-backed securities (a ~ $12 trillion market) and auto loans (~ $162 billion), among others.
That's because NFTs could be used to prove ownership of stocks, real estate, and other financial assets, especially derivatives. We've already seen the creation of financial NFTs like Uniswap v3 positions and chicken bonds, and Astaria will launch with loan terms for both, with more to follow.
"Our mission is to provide instant liquidity for any on-chain asset," says Delong. "That means going beyond the art side of NFTs."
The potential applications of NFT lending—from helping CryptoPunk owners to being the platform for future financial markets—is extensive and exciting. Astaria is solving one of the most important problems in DeFi, and Center is helping Astaria by handling NFT-infrastructure schleps so they can focus on building a liquidity machine.