Chris Ciobanica wanted a loan to invest in cryptocurrency projects. But instead of using a bank that would require him to put up his home or car as collateral, he tried an upstart website called Arcade that specializes in connecting owners of digital art and collectibles, called non-fungible tokens, with lenders.
Ciobanica, a digital art collector who goes by Silver Surfer, submitted a collection of 10 so-called NFTs by well-known artists Pak and Fewocious to the service that he says is worth about $5 million. Not long after, Genesis, a firm which lends cryptocurrencies to borrowers, offered him a six-month $1.25 million loan with a 7.5% interest rate over that period, the equivalent of a 15% annual rate.
Eventually, Ciobanica expects that the borrowed money he invests in early cryptocurrency projects will return a profit. Is he worried about losing his NFTs, if he fails to pay back the loan? Not one bit, he told Fortune.
“I rarely make bad bets,” Ciobanica said.
Independent lenders are increasingly using services like Arcade to connect with NFT owners who want to borrow money by using their NFTs as collateral. The idea is to give people who sink large amounts of money into NFTs, an increasingly popular investment, a way to get some cash without having to sell their digital assets.
In 2021, people spent $44 billion buying and selling NFTs, according to blockchain data platform Chainanalysis. A number of NFTs from popular collections, like CryptoPunks and Bored Ape Yacht Club, have sold for millions of dollars, including to celebrities such as tennis star Serena Williams and late-night talk show host Jimmy Fallon.
Lenders are attracted to using services like Arcade by the potential of charging interest rates that far exceed traditional loans. In theory, they could also take ownership of an NFT used as collateral if a borrower defaults.
The interest rates for loans on Arcade can vary depending on the type of NFT, the duration of the loan, and the loan to value ratio—calculated by looking at the difference in the loan amount and the appraised value of the NFTs. Arcade CEO Gabe Frank said the average annual interest rate for loans transacted on the website, which varies based on the duration of the loan, is about 20%.
Borrowers, on the other hand, can get large sums of cryptocurrency and keep their NFT, as long as they repay it. This beats them having to sell the NFT, which is difficult because there are fewer buyers in the market for such expensive assets, said Frank.
In addition to Arcade, borrowers can post their loan requests on websites such as NFTfi, PawnFi, and TrustNFT. All of the services were introduced in the last two years.
Since Arcade opened for business four months ago, Frank said his company has helped shepherd $10 million in loans between a limited number of clients. Last week, Arcade opened the door wider to the public at large, which means anyone with highly-valued NFTs can request a loan through its website.
Borrowers who use the site must connect their crypto wallets to the loan app. The website automatically shows which NFTs they own and asks them to pick the ones they’d like to use as collateral. They also enter their desired loan amount, the duration of the loan, and the amount they’re willing to repay at the end. Borrowers who are open to counteroffers from lenders can indicate so through the website.
Loans are originated after a lender accepts the borrower’s terms or a borrower accepts the terms offered to them by a lender. At that point, the NFT used as collateral is digitally locked and then unlocked only after the borrower repays the loan in full, plus interest, through the app, or defaults, allowing the lender to claim the locked collateral.
For every loan it originates, Arcade collects a 2% fee from what the borrower would receive, said Frank. Larger loan sizes have a tiered fee structure, he said.
Frank said 95% of NFTs are worthless. Yet, a small number have become “cultural artifacts,” which are the ones that the lenders using his service are looking for, he said.
“These things are like digital diamonds,” Frank said.
He pointed to a transaction last week that involved a loan of 1,250 Ether, or nearly $4 million as of Monday, for someone who put up two rare zombie cryptopunk NFTs as collateral. Currently, Arcade has $20 million of what it calls “blue chip NFTs” locked up in exchange for loans, he said.
For now, the market for NFT-backed loans is operating largely without regulation, despite Securities and Exchange Commission Chair Gary Gensler saying in August that the crypto asset class is “rife with fraud, scams, and abuse in certain applications.” For borrowers and lenders using Arcade or its rivals, it’s user beware.
Lenders can range from high network individuals to institutional lenders of cryptocurrency and decentralized autonomous organizations, or DAOs—member-owned internet communities with no centralized leadership.
So far, nobody who has used Arcade’s service has defaulted on a loan. Frank said even if borrowers think they cannot meet the loan repayment deadline, they can work out an agreement with the lender to extend the duration of the loan another three or six months, for example, as long as the borrower can pay the interest owed at the end of the original term.
In terms of the future, Frank said his team is working to create a way for his service to automatically value NFTs through the application and to allow users to pay their loans in installments.
By the time it turns a year old, Frank hopes Arcade will have helped facilitate $100 million in loans.
“We think this market will be in the billions in a few years,” he said.
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