September's AMA Recap: Nexo NFTs & Lending Desk

6 min read

In this month’s AMA session Nexo Co-Founder & Managing Partner Antoni Trenchev turns the spotlight on NFTs and NFT-backed loans on Nexo. Antoni is joined by none other than Nexo’s very own DeFi Strategist, Kiril Nikolov, as both answer insightful questions from community members.

There is so much more to non-fungible tokens than meets the eye, pun intended, so read the recap below or watch the video to learn what’s next for NFTs on Nexo and how this new-born industry could evolve with usable products and features.

Does Nexo plan to create NFTs? (03:48)

Antoni: We have a very holistic approach to everything we do at Nexo. In the early days, we were just a crypto lender, issuing crypto-backed loans – hugely revolutionary in 2018, since nobody was offering that in any meaningful way.

What we tend to do is start out in a way that addresses the first needs of the community and then develop a holistic offering. We will be applying the same strategy to the NFT world, providing a suite of products. Whether we ourselves as a company are going to issue NFTs? We will see about that. We will offer a global NFT platform that will encompass a lot of exciting things, based on the needs that we see from the community and you guys.

Kiril: NFT lending is the most natural entry point for Nexo – we’re most known for our crypto credit lines and therefore NFT-backed credit is the natural way for us to get started in NFTs. That’s not the only way we can participate and help the NFT space. I think just by standing by our strong points – building financial products, derivatives, and trading we can add a lot to the space and of course bring the 5 years of experience we have with crypto credit lines and risk management. All of this will come in handy when we get fully into NFTs.

Q: Beyond the NFT jpegs hype, what do you think of NFTs as a technology to prove, let’s say, that you own your apartment? (06:43)

Kiril: We all love overpriced NFTs – even Nexo as a company owns a beautiful set of 3 laser-eyed apes. That said, we are very far from this point. I think the true NFT adoption will come once we stop referring to NFTs as NFTs and start saying “I will transfer ownership of the house to you” and not mention or care about the technology behind that, because we know it just works. I can only speculate when it comes to adoption – the first to get adopted will be online-native assets. Obviously, jpegs was the first one. The next will be domain names – we’re already seeing a lot of traction with Ethereum Name Service.

Based on my experience with domains, NFTs will make transferring, trading and even issuing domain names much more efficient. Internet-native assets are the first ones to get adopted and they will have the most natural and quickest process from an adoption standpoint. If you look at event tickets for example, we can benefit from programmability and immutability, we can avoid a lot of scams connected to event tickets. We can avoid a lot of that with NFTs, but the adoption will be much more difficult. Real estate is the most complex thing you can put in an NFT, just because your grandma has to be able to buy and sell and transfer ownership of her house and that’s very unlikely to happen with an NFT.

Can we get a rough idea of how much money has Nexo lent to users who use NFTs as collateral? (12:00)

Antoni: On the grand scale of things, it is insignificant – single-digit millions and it is for two reasons. First of all, since May there has been a correction mode across risk-on assets and that includes NFTs. The interest for NFT-backed lending has slowed down and generally the adoption is nowhere comparable to something like Bitcoin. It also has to do with the way we’re handling collateral and how we would go about recouping the principal and the interest in the unfortunate event that an NFT crashes in price.

Kiril: At this point the main reason we haven’t scaled more aggressively, is that right now the NFT lending desk is an OTC service. Ultimately, it’s not as scalable as our crypto credit lines. The end-goal is to fully automate the process and deliver an end-to-end solution.

Can anyone get rekt for not repaying an NFT-backed loan? (16:02)

Kiril: The main thing is that, the way our loans are set up today, they are fixed-term, meaning that you don’t have to think about margin calls. Margin calls are the most important thing to look out for when borrowing against crypto. In our lending set-up today, you don’t have this.

If you’re borrowing against NFTs, you have a 3-month duration – the only thing you should care about is your ability to pay back after the 3 months. And it doesn’t matter what happens to the price of the collateral in the meantime. That said, every type of credit has to be sustainable – it’s up to everybody to assess what’s reasonable and feasible, and not take excessive risk.

How do you calculate the LTV ratio and generally decide when to liquidate a client? (22:50)

Kiril: The best way to describe the value is that it “lives” somewhere at the intersection of art and science. On one hand, we’re working with partners that serve as the liquidators of the collateral, so we take their evaluation into account. Based on this, we’re able to size the loans to make sure we’re completely covered. On the other hand, we’re using for reference an internal tool, developed by one of our internally-incubated projects – essentially an algorithm to price NFTs in real time. When you take both of these tools, you get the best of both worlds. As the liquidity improves and the NFTs mature, I think the algo- part of the solution will be a much bigger part of the equation. For now, we rely on both human and algorithmic evaluation.

What happens in the liquidation? Nothing happens until the maturity date, so even if your collateral is less than the loan size, you potentially have a few days, few weeks and a few months before any liquidation is performed. You can figure out how to go about it – whether you want to pay back your loan or not. And this is in stark contrast with real-time liquidations. We’re looking to automate the entire service and then really start to lend at scale and become the largest NFT lender.

Nexo’s lending desk can be used as art financing. Do you see client interest and any potential in this sphere? (27:22)

Antoni: We want to be and are working with several auction houses on becoming the de facto art financer in both NFT auctions, which are crypto-native and traditional art for people who have their wealth in crypto. We’re working on numerous ways in this intersection between art, finance, NFTs and utilizing the existing product. This will be one of the use cases for NFTs and crypto – this intersection with art, which I think is closer to becoming larger-scale.

When are you adding new NFT collections and how do you decide which ones to add? (31:17)

Kiril: Adding new collections is crucial towards building out our NFT lending portfolio. Just like we’re adding new assets to the platform, we should be adding new collections to the lending capabilities regularly. There are two things we’re looking at most prominently – the most important one is the ability of our hedging partners to take on the risk of the collateral and take the directional bet that if the borrower defaults, they will take on the NFT at a predefined price.

If our partners are willing to take this risk, then we have the capabilities to add this collection to the size that our partners are willing to take in. The next question is “Can we handle all the volume”. Right now, we have opted out of adding new collections regularly to focus on a more automated solution. Once this is live, we will focus on scaling and adding new collections – there’s no reason to not have a Doodle-backed loan.

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