Pantera Partners: NFTFi Protocol Arcade – Digital Art to RWA

Paul Veradittakit, Partner, Pantera Capital;

Arcade is an NFT-centric p2p lending platform. Since its launch in early 2022, Arcade has facilitated approximately $150 million in NFT loans, reached $27 million in TVL, and $14 million in active lending. Recently, Arcade launched the V3 version of its protocol and launched ArcadeDAO as the decentralized governance body of the protocol. In this article, we’ll take a brief look at Arcade’s history and its future potential in the broader NFTFi space.

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1. Development and History

As NFTs began to take off in early 2021, Arcade founders Gabe Frank and Robert Masiello realized the huge potential of providing new financial infrastructure for this emerging NFT asset class. Although NFTs looked like just personal avatars at the time, Frank and Masiello recognized that NFTs could represent the next evolution of digital assets – not just digital art and collectibles, but real-world assets and goods as well.

Arcade Protocol v1 was released in January 2022 after completing a second round of funding led by Pantera in December 2021. Since then, Arcade has been a pioneer in the financialization of NFTs, including closing the first on-chain digital art bundle loan – a $1.25 million USDC loan backed by NFTs in February 2022, with Genesis as the lender.

By August 2022, when Arcade Protocol released V2, the total transaction volume of the protocol had exceeded $15 million. V2 introduces more sophisticated features, allowing lenders to lend for entire collections, and more.

In the third quarter of 2023, Arcade’s total trading volume exceeded $100 million, and two major upgrades were made: the first was the release of V3 version of the Arcade protocol in September 2023, and in October of that year, the project ushered in the second upgrade, launching its decentralized on-chain governance body, ArcadeDAO, and governance token.

As of November 1, 2023, the total trading volume of the agreement was approximately $150 million. Among them, the total loan amount of CryptoPunk is about $33 million, the loan amount of digital art is about $140 million, and the loan amount of real world assets (RWA) and real world goods (RWG) is about $2 million. For platform lenders, they have earned about $2 million in interest income with an average APR of 16% per annum. Default rates across the platform have also remained low, with defaults of around 8% for all 3,500 loans.

2, NFTFi: From digital art to real-world assets

Notably, Arcade pioneered blockchain-based RWA loans for luxury goods and other goods, with a total loan amount of $2 million, demonstrating the huge potential of blockchain for physical commodity collateralized lending. For example, on July 7, 2023, Arcade spearheaded the launch of several loans backed by NFTs representing Rolex watches, with NFTs valued at over $10,000, arguably the first examples of the use of tokenized RWAs as loan backing.

Since then, Arcade has implemented a wide variety of RWA and RWG-backed on-chain loans. This includes a $1.1 million loan for a series of T-shirts bearing the Supreme logo that have previously been assessed by Christie’s.

Going forward, the Arcade team believes that RWA-backed lending will become an increasingly important part of future NFT lending activities, both in the Arcade ecosystem and beyond. The team’s view is especially true in an environment where the NFT hype around avatar images has subsided, and at the same time, there is growing interest in using NFTs to digitally represent RWA to create novel financial innovations.

As Gabe Frank points out, “an innovation in mortgage lending is long overdue”. In addition to the crypto space, Arcade also represents a concept with greater potential, combining tokenized assets with on-chain liquidity, providing a more modern approach to real-world asset lending. The typical APR for NFTs on Arcade averages between 15-20% per annum, which is still significantly lower than traditional private lenders, which levy mortgaged APRs of up to 120%.

As Robert Masiello points out, it is crucial that the value creation of RWA NFTs lies not in the “tokenization” itself, but in the “financialization” of tokenized assets, such as the ability to borrow based on these tokenized expressions. After all, if I have a tokenized Rolex and I can’t do anything, what’s the point of me having it? In addition, Masiello believes that one of the core values of the crypto space is to provide a set of financial instruments that are easier to use and more ingenious than traditional financial solutions. Arcade’s goal is to position itself as a hub for redefining financial instruments, unlocking liquidity and a financial toolbox in the crypto space for a wide variety of real-world assets.

3. Conclusion

Arcade’s transition from digital art NFT-backed assets to real-world assets, such as luxury watches and branded apparel, can bring a grander vision to NFTs that goes beyond the traditional concept of avatars. In this sense, Arcade’s growth and development over the past few years reflects the gradual maturation of the NFT space.

What NFTs are likely to offer in the future is a unified framework for traditional and digital assets certified by public blockchains. In turn, NFTFi represents a new opportunity to standardize financial processes and tools across the physical and digital realms. Whether it’s CryptoPunk, Rolex, or luxury T-shirts, their tokenized expressions can be used for mortgages and other financial instruments, ultimately bringing greater transparency and accountability to the traditional and digital financial universes, and creating a more effective and unified way of representing “value” in the digital world.