Partner of Pantera Capital: Understanding the Arcade of "Packaging NFT" Lending Protocol

In 2021, the NFT industry will experience explosive growth, with sales exceeding $41 billion. However, most of the NFT value is achieved through simple buying and selling on exchanges. As a powerful asset class, NFT has great potential. In order to fully tap the value of this field, it is crucial to develop better NFT functions and applications in DeFi. Only by doing so, investors can lay out the NFT market in their portfolios in a more complex and granular way.
Arcade is a newly launched DeFi project that has built a suite of applications and infrastructure to fuel its growth with NFTs as a financial asset class. Recently, they launched a flagship product, an NFT lending platform using the Pawn protocol: a peer-to-peer lending protocol that allows NFT holders to unlock ERC-20 token liquidity by posting their NFTs as collateral.
The innovation of the Pawn protocol is the introduction of the concept of "wrapped NFT (wNFT)". Borrowers can combine their ERC-20 assets and NFTs in any combination and put them into the token pool to mint wNFTs. Next, these wNFTs can be used as collateral for ERC-20 asset loans; borrowers simply list their loan terms (amount, currency, term, and interest rate) and post them to the Arcade Lending platform.
Lenders can view various loan needs of borrowers, as well as their loan terms and wNFT collateral, on the Arcade platform. Once the lender has determined the loan agreement they want to fulfill, they will accept the borrower's ERC-20 token assets as collateral, issue the loan and sign the digitized loan terms. Once the borrower defaults on the loan, the lender can claim the assets packaged into the wNFT by the borrower. All in all, this model combines the convenience of off-chain negotiation with the robustness of on-chain settlement, giving users an incredibly intuitive and secure experience.
Through the Pawn protocol, borrowers can also easily apply for a loan rollover, which allows them to use the loan to fund long-term positions. This process is achieved through Aave's flash loan technology; the protocol takes out a flash loan to repay the borrower's loan, issues a new loan to the borrower, and uses the proceeds of the new loan to repay the flash loan - and all of this is done in a single block transaction.
To date, the platform has provided more than $5 million in loans through private beta versions. Arcade plans to release its platform to the public in the coming months, and plans to develop more financial features around NFTs, including asset management applications, Peer-to-Pool liquidity, and more.
Ultimately, Arcade's goal is to unlock unprecedented liquidity with every loan in a user's NFT portfolio, bringing NFTs closer to the expanding DeFi space with a bright future.


From DeFi to NFT-Fi

2021 will undoubtedly be a breakthrough year for NFTs – the global NFT market has surpassed $41 billion in sales by the end of December. Collections such as Bored Ape Yacht Club (BAYC) and NBA Top Shot have become household names, while celebrity artists such as Beeple have sold their digital artwork for more than $69 million. In fact, NFTs are not just those pictures we see, other verticals such as games, music and sports goods are also increasingly eager to integrate NFTs into their ecosystems, this trend has also driven Royal, Axie The launch and development of projects such as Infinity. Overall, the demand for digital primitives for verifiable ownership is growing rapidly in 2021, and the NFT ecosystem continues to capture value at an incredible rate.

Unfortunately, although the value of NFTs has risen significantly, the means for users to obtain the actual value of NFTs are still very limited, and people's understanding of NFT-Fi is only limited to trading NFTs through trading platforms such as OpenSea and profiting from price changes. Conceptually. In fact, as an emerging digital asset, NFTs — many of which are worth millions of dollars — offer far more value than financial assets alone. This is like in the traditional financial field, the real estate industry will consider not just simple buying and selling, but how to generate more material value on this basis, we see:

Mortgage loans are often traded on the secondary market;
Home titles are also often used as collateral for large credits;
You can even get a medical or educational loan through real estate and use it for a stock position.
Therefore, in order to fully realize the value of NFT, a financial asset class, it is very important to develop more NFT functions and applications in DeFi. Only in this way can investors deploy the NFT market in a more complex and sophisticated way in their portfolios.



What is Arcade?

Arcade is a newly launched DeFi project that has built a suite of applications and infrastructure to fuel its growth with NFTs as a financial asset class. Arcade enables end users, including NFT creators, collectors, and liquidity providers, to leverage their NFTs in countless financial use cases. The development of multifunctional, highly usable primitives is especially important these days, as NFTs have evolved from simple digital artworks to representations of metaverse assets and ownership.

Currently, the core flagship application launched by Arcade is the Pawn Protocol, a peer-to-peer lending platform that allows NFT holders to unlock ERC-20 token liquidity by issuing their NFTs as collateral. The protocol has provided more than $5 million in loans through private beta, including a massive $800,000 loan from lenders with up to $10 billion in assets under management. Over the next few months, Arcade also plans to open up access to Pawn Protocol to the public and roll out other features, including Peer-to-Pool liquidity, flash loan interest payments, and asset management applications, among others.



How do I get a loan on Arcade?

The key to Arcade's ability to support NFTs as loan collateral is to build the concept of "wrapped NFTs (wNFTs)." In a general sense, a wrapped token is a token whose price is pegged to another cryptocurrency or a basket of cryptocurrencies. For example, wrapped Bitcoin (wBTC) is an ERC-20 pegged to the price of Bitcoin that allows BTC holders to spend their Bitcoin on Ethereum.

The Pawn protocol allows users to mint wNFTs pegged to a mixed value of ERC-20, ERC-721, ERC-1155, users log into Arcade using their MetaMask wallet, and choose from their portfolio they want to use as collateral for a loan Cryptocurrencies, stablecoins or NFTs. They can then mint wNFTs that represent a "basket of token value". Importantly, this wNFT technology provides borrowers with extremely flexible mortgage options. Not only that, because borrowers can mix and match a variety of NFT and ERC-20 tokens, they also have access to more loans and greater liquidity than other NFT liquidity protocols.

Once you have wNFT, users can apply for a loan by simply setting the loan conditions and elements on the Arcade platform. The relevant conditions and elements include:

Amount you wish to borrow
Currency you wish to borrow (any ERC-20, usually wETH or stablecoin)
Amount that can be repaid (or equivalent interest rate)
The user then digitally signs their loan terms and determines the deposit for each item they choose as collateral before posting this loan request to the platform; these collaterals selected by the user are then withdrawn from them during the loan period wallet to a third-party custodian. Finally, the request is submitted to Arcade's P2P marketplace, where the request will be matched with lenders that accept user-specified loan terms and collateral. It is worth noting that when this loan is created, the borrower also pays 2% of the principal to the protocol as a processing fee.