SDIP-39: Arcade Lending Program

Brief Authors: NiftyFifty
Project lead: NiftyFifty
Squad: Acquisitions
Creative approval: N/A

Abstract

We started our lending activity in February 2022. In these 11 months, we’ve deployed 250 ETH, issued 57 loans, and generated a profit of more than 38 ETH with all the matured loans being profitable (i.e. either repaid or defaulted in the money). The annualized yield is around 35%.

This activity has been exclusively on NFTfi.

We propose authorizing 100 ETH for manual loans on a different lending platform, Arcade. The loans will be backed by Art Blocks Curated collections (including Squiggles) and Meridians (we would like to exceptionally include Meridians as it is at a similar level than most Curated collections and there is significant lending activity).

This funding will be used in Arcade (primarily) and NFTfi (secondarily) if not enough loans are generated on Arcade to use all the available funds. In the scenario that these funds are not being sufficiently used, we will return them to the treasury and stop this activity.

The Acquisitions Squad will have discretion over both loan terms and the listings/sales of any foreclosed pieces. We will record all data separately so we can measure the individual performance of this program.

Motivation

We aspire to be the leaders in Squiggle backed loans and really strong in lending against the wider Art Blocks ecosystem. In order to keep progressing towards that goal, we need to expand to more lending platforms.

Arcade has good traction with more than 700 loans originated and more than 40 million dollars in volume.

As already mentioned, this SDIP is to keep building our lending activity that the DAO has been pursuing for some time. Please see previous SDIPs for further details:

  • SDIP-22: NFTfi Lending/Borrowing Program
  • SDIP-24: Additional funds for NFT lending
  • SDIP-28: NFT Lending Expanded Program
  • SDIP-30: NFTfi Lending bot MVP
  • SDIP-34: NFTfi lending bot Expanded Program
  • SDIP-38: Art Blocks Curated Lending Program

Success Conditions

  1. Generate revenue for the DAO. This might be in the form of yield (if loans are repaid) or in the form of profit when selling the foreclosed NFT (if loans default). Note that we don’t expect -or need- all defaults to be profitable, but on average we do need to be profitable for this program to be considered successful
  2. Generate a 20%+ Internal Rate of Return with this program (this includes profit from defaults and yield earned on repayments)

Risks / Risk Management

As with any investing strategy, there are some risks involved:

  • Smart contract risk: the most important risk we are assuming. It is limited as there has been $40M of loan volume on Arcade so far (with collaterals such as AB Curated, CryptoPunks, Autoglyphs, etc.) with no significant issues
  • Market risk: if the floor drops below our loan value and the loan defaults, we would be acquiring a piece at a price above market. We would record this loss and keep track of the overall performance of the program, as previously mentioned, we don’t need all loans to be profitable for the strategy as a whole to be considered successful
  • Concentration risk: we will monitor concentration in terms of counterparties and maturities. Being the latter especially relevant as if there is a sudden drop in prices, most loans maturing around that date could default
  • Credit risk: obviously limited by the collateral

It is important to mention that, in addition to the above risks, there is an opportunity cost as we will be using some ETH, but this is limited as -at this stage- we would not be using that money otherwise.

Specification

  • We will focus on Arcade as the primary platform and have NFTfi as a secondary option to maximize utilization of these funds
  • We will set up a new wallet “Arcade Lending” controlled by NiftyFifty specifically for this activity
  • It will be a hardware wallet as multisig wallets are not yet available
  • Arcade Lending wallet will be funded with ETH from the Treasury
  • The Acquisitions Squad will have discretion over loan terms
  • Loan offers can be made on any Art Blocks Curated collection (including Squiggles) + Meridians
  • Performance of the program will be periodically reported to the DAO
  • We will sell any foreclosed pieces at the discretion of the Acquisitions Squad

Launch Details

Project will be launched according to the specifications above, at the timing and discretion of the operators.

Costs

100 ETH (though some or all of this could return back to the treasury depending on the outcome of the lending activity).

Rewards

N/A