Zima Red ep 111: Conor & David - Metastreet: The Billion Dollar NFT Credit Market Opportunity
Primer: Metastreet offers a variety of algorithmic capital vaults that generate diversified yield through automatic underwriting, aggregation and execution of NFT-backed notes. Get into the details of Metastreet with Conor Moore and David Choi in this episode of the Zima Red podcast.
Background
Conor
Started his career in investment banking
Met David during his internship with Deutsche Bank
After 2 years of banking, he worked in private equity for another 2 years, all within the real estate space
Have been consistently talking to David about crypto
Started talking more seriously about the NFT space. Saw parallels to real estate lending
David
Studied art history as his major
First job was doing option pricing for artworks doing a sale-leaseback mechanism using Monte Carlo simulations
Found out about crypto and it blew his mind
Have been investing in the space since 2017
Why Is Lending Important In The Crypto/NFT World?
NFTs today are viewed as an unproductive asset
They view NFTs as a cash flow generating asset that could be borrowed against to free up liquidity
When these assets are lend out, it enables the development of a capital market
In the traditional art world, art was used to finance the purchase of other art
“It was actually almost like a cashless exercise where you collateralize artwork to buy artwork, or rather guarantee the price of one.”
- David Choi
Metastreet
A liquidity routing and scaling protocol that helps scale NFT collateralization platforms
It’s not a marketplace
It’s a protocol that improves the capital efficiency in NFT-backed lending ecosystems
Why Did They Decide To Target This Market?
It’s a blue ocean of opportunity for them
There’s no productive debt capital market for NFTs yet
There’s also a need for longer-term borrows in the emergent Metaverse space
Their Products
Have a vault that accepts deposits. They have a mitigation waterfall where there’s different layers of seniority with different risk-return profiles
When depositors lend capital, they mint an NFT that represents the contractual agreement
Those loans could be sold to Metastreet where they use algorithms to price them
Uses a democratic governance process to decide what is credit worthy or not
The User Flow
2 types of participants on their platform:
Users depositing DAI in their vault. They get back DAI with added yield and risk
More sophisticated players who are on NFTfi, Arcade, etc. who receive the weekly rates that Metastreet provides. These players generate promissory notes to get access to the liquidity
Promissory notes are sold so that holders can exit their position before the maturity date, taking advantage of the delta between the value of the NFT when the loan was originally made vs its current value
The Mitigation Waterfall
Has 2 positions:
A senior position
A junior position
The senior position has an APR that is set by governance
The junior position takes the spread between the Vault APR minus the senior APR
The Underwriting Process
Underwriting is boring — people put in a lot of work for marginal yield
They have a ship buoyancy game where people modify the best way for the ship to deliver its cargo while maintaining buoyancy
“I should call it simulation finance, where people don't know they're being productive, but they are. It's like similar to Ender's Game instead of Ready Player One. Spoilers, Ender’s in the game, and he realizes, oh, these are real pilots. This is a simulation, but it's not a simulation. I'm actually doing something productive.”
- David Choi
Can It Be Possible For People To Behave Slightly Maliciously?
💡 Andrew highlighted the following scenario: Can someone direct capital towards something they like and starve capital from things they don’t like?
Have some plans to make it possible in the future to make it more exciting and game-like
There should be competition to determine where capital should go to
They are discouraging the bribe model. People are not just routing capital, but are also adjusting parameters
Have a socialized loss concept where capital is used to incentivize certain routing or efficient markets for debt
How Governance In Metastreet Lowers The Cost Of Capital
As education grows and people understand the risks better, they end up allocating capital better
As a result, this allows for cheaper interest rates
How Does Transparency In The On-Chain Debt Markets Improve The Stability Of The Markets?
Building out data analytics and research for Metastreet
Will be creating tools for the community to outline their NFT collateral valuation process
Will be building up a team of data scientists
Gamification And The Metaverse Economy
David’s favourite example is DeFi Kingdoms, which has the 3 factors of production right:
Cash: JEWEL
Capital Asset: The NFTs
In-game Quests
The 3 pillars form an independent economy
“And that's what an NFT is. A sword is no different to me than a house or land or anything like that. It's just data that's representing one's ownership and hard asset.”
- David Choi
Scaling Metastreet
Will start with a heavy research base
Hope that it will become autonomous and the community can develop their own research
Need the community to reach a critical mass of understanding how underwriting works
They are creating an underwriting protocol that is very digestible
Insights They Have Learned
Every week, one member of their team does a deep dive into a protocol
There are many innovative features that people do not know unless they researched deeply into the projects
Got a lot of inspiration from Curve
Speaking with many projects and participants, getting to know about their pain points, and taking action to address them
Why Did They Decide To Set Up As A DAO Instead Of A Company?
Believes that a distributed system is better in the long run
Building the capital markets in the metaverse shouldn’t be done through a company, but by participants of the metaverse
Where Will Metastreet Expand Into?
Launching a Metastreet-like banking branch/credit union in the Metaverse
Structured products such as Metaverse mortgages
Wants to figure out how to borrow against an asset while also using it
Seasons (formerly AxieTree) tried to do this by allowing people to lend against the scholarship agreement
Grand 5-10 Year Vision
Metastreet will become synonymous with the Metaverse debt capital market
Single Favourite NFT
David
NFT of the codebase of a decentralized auction protocol that he got through Mint Fund
Owns a ton of RECUR passes
Conor
Likes the Wanderers
Most Controversial Thought On NFTs
Conor
Don’t think that NFTs should be priced in ETH
Should start to think in stablecoin/dollar denominations
David
Voting is incredibly boring
If You Could Improve One Thing In The NFT Space
David
Want 50% of marketplaces to disappear
It’s the most boring idea with no nuance. There are other business ideas that can be made
Conor
Want Trezor to work on everything
Half the time, he has issues with hardware wallets working
NFT Ecosystem In 3 Years
David
NFTs will become larger than the real world
NFTs are the raw resources of the digital world
Conor
There will be huge growth and growing pains
A lot of gaming ideas will be taking longer than what people are expecting
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