[Discussion] NFT Vaults

Hi Everyone,

With the sale of Beeple’s 5000-day NFT today for $69 Million, I have been inspired to write a post about Maker creating NFT vaults. Now that a lot of these are selling for serious money (and are worth a lot) I think there is a greater argument for us pursuing this as a means of greater diversification/DAI creation.

  • What are the technical hurdles to making this a reality?
  • What kind of oracle would be needed?
  • How would it be implemented?
  • Would the NFT owners even want to use this service?
  • Would we want a static oracle that could be updated by governance?
  • How would it get updated if the piece sold for more/less?
  • Would it be voted on by governance whenever it changed?
  • How would we liquidate it if for some reason we needed to?
  • What happens if it sells for less than the DAI it has generated/collateral ratio?
  • Should we be going direct to customer or through an aggregator i.e. Centrifuge/NFTX?
  • NFT Core Unit?

I think these types of events will become more and more commonplace as NFTs continue to gain ground in the collective consciousness of society and think we should work to be at the forefront of unlocking the potential of these collateral types, for the good of MakerDAO.

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The main hurdle to me would be volatility.

NFT’s are extremely volatile and having a token sell for a set price has almost no bearing on its future market value. With projects coming and going in the span of weeks, there’s currently no NFT market that has historically proven to be reliable in terms of an established economy. Even in the most mature ones, like Cryptokitties, you only have a subset of tokens presenting “objective” value to the ecosystem, the rest being simple speculation.

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Right. We would be taking the risk depending on the legitimacy of the valuation depending on the nft. I could see it being feasible for specific high profile nfts like beeple’s or the like and as long as the collateral ratio was conservative you could probably be ok. Might be something to experiment with in the next bear market :laughing:.

Before we start, we should try to assess how much value (potential Dai supply) it would bring and benchmark to that current collateral vaults, then compare that to the technical + risk + oracles work we would need to make it a reality. Loose thoughts:

  • What kind of NFT are we talking here? Liquidity for a digital art NFT would be different than an NFT representing real estate mortgage. (Here’s one framing) Does it matter for a Maker vault you’re thinking (I assume yes for liquidations)?
  • Also, are Centrifuge real world assets not NFTs? :wink:
  • Should we work with specific partners like FlamingoDAO or for those with high volume sales on this list?

On the positive side:

I believe there’s an increased interest in owners leveraging NFTs as collateral, but I don’t have exact data on liquidity. Here’s a few that might help us better understand NFT performance and potential liquidity. I know one or two more that haven’t officially launched yet, but have similar intentions:

  • NFTFi - Marketplace for NFT loans
  • NFTX - Index fund
  • NFTBank - Portofolio manager?
  • Rocket: Not sure what happened with this one

I’m in favor of second mover advantage on this one :wink:

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Perhaps a good start to the discussion, especially on the more esoteric NFTs (I’m thinking digital art), would be to bring in the subject matter experts, like the teams behind leading exchanges (Rarible, Superrare, etc.)? That could ground any analysis we all do or review for the potential of onboarding the latest Beeple or something similar.

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+1 on bringing subject matter experts. Community driven collateral assessment would be awesome!

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@Aaron_Bartsch Thank you for bringing up this topic!

I think NFT Vaults will be a valuable contribution if issues can be overcome.

Issue 1:
Real world art that has any value of significance is quite old. They have been traded and/or stolen multiple times. They are in art books. The only slight exceptions to this rule is art made ny celebrities (Banksy, Jeff Koons etc) . NFTs are problematic in this respect as they are much too new.

Possible solution: NFTs needs to have some kind of story, better than etherscan.

Issue 2:
Quality. On Opensea there was a hairless flying cat with tentacles sold for Dai 999. Production time max 10 minutes?

Possible solution: the NFT space is screaming for art curators. Someone with a bit of authority that can stamp “quality” on NFTs, or at least explain why they are rare and why they could retain or grow in value. Again this needs to go with the NFT itself.

Issue 3:
Scams. It is way too easy to open multiple accounts and trade NFTs back and forth to create a false history of value. There must be a more open and more provable record of transactions for any real value to be placed on the NFT.

A bit of a hill to climb this is. Good news is that the NFT boom has barely begun and with better trace of origin there is no reason why every sports club in the world would not join in. And why stop there? Even world religions could join in - one example would be NFT icons authorized by the Eastern Orthodox church. This party has barely started.

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This trumps all other issues. It’s obvious.

I was thinking about the downsides of NFTs, and the obvious ones are that we are more than likely in a euphoric bubble that will probably end in tears for folks like me (all good). Then I came across this interesting new movement by Artists who are claiming that NFT minting on Ethereum have a negative impact on the environment. Someone has created this website cryptoart.wtf (unsecured). This article provides more details: NFTs Are Hot. So Is Their Effect on the Earth’s Climate | WIRED

image

EDIT: They actually were successful in stopping an Art website from launching on Monday–A high percentage withdrew their submissions.

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I would disagree with the underlying structure of this statement. Valuing art from artist as a “celebrity” is different than value through age. Artist discovery is much different now (thanks social media), but if you think of “Picasso”, “Michelangelo”, “Andy Warhol” etc are artist celebrities as well. The lifespan of NFTs (and its creators) is akin to tracking emerging artists in the traditional art world. Regarding value through age and its relationship to trade/stealing, I would argue digitizing transactions give art more opportunities to trade and transparency around price discovery, therefore pushing value at a faster rate. Where I do see the connection is how long a piece of art takes to appreciate. I believe we’re seeing secondary sales at a much faster rate than physical pieces (which require appraising, shipping, etc). I’m fairly confident we’ll see some kind of “stealing” valuable digital art at some point (also why you may want to keep anonymous and be careful where you store your valuable digital works)

100% agree!

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So, you are saying it’s basically speculation. And valuations can be extremely volatile and not usable for Maker protocol.

American Football Player Rob Gronkowski claims his NFTs “Gronks”, only go up! :laughing:

On a positive note, Alexis Ohanian has made his Largest investment in NFTs for Women’s sports via “776”–pretty cool:

image

General reaction to this is based on discussions with others.

These NFTs have quite variable value. In a great many cases it is almost binary. They have some value, they have no value. I mean these literally are tulips and look to me to be the next value gambling component. Also in a great many cases ‘locking’ up the NFT basically removes it from use (think of the rare swords or armor in some games).

Right now I am basically a no on these because I think the LR/SF would have to be so high as to make borrowing against them pointless. I mean do we really want to get into loaning based on deposits of pancakes with jesus images on them?

I for one would rather focus on key RWAs that are known to retain value than even higher speculative value being created in crypto (NFT or more illiquid speculative investments)

This brings me back to a key thesis here.

Given that Maker productivity is limited shouldn’t we be focusing efforts in key areas to generate real return/value? I mean I know people are chomping at the bit to get more DC in the UNI V2 LPs (almost across the board except for USDT). Growth in DAI is rampaging at 1000%/yr and honestly I’d rather see resources dedicated on Liq2.0, DSChief upgrade, bringing in something more than 50-100 governance voters. Strategic Reserve development so we can both find, hire and retain qualified staff.

I really want to see something in these core units that shows a sense of unification, and general integrity vs. all of them seemingly expanding into their own interests vs. becoming a well unified team focused on laying out and going after the low hanging fruit both organizationally, as well as financially. Right now there is a difficult and massive transition from Foundation to MakerDAO that requires a huge amount of effort.

Lets get some sense of prioritization and focus before going off into really speculative stuff that probably is going to require a huge amount of effort (we don’t have) and give a really crappy yield for effort. I can think of maybe 10 other things Maker should be working on than integrating NFTs atm.

Also don’t get my tone wrong here. I appreciate people thinking of stuff but when I see that ideas I have presented over a year ago just coming up to be addressed now I realized that new ideas wern’t the problem but actually getting anything tangibly done on any ideas much less the most important ones.

Here is a better question: Ask current MakerDAO staff what they need now to help them better achieve their goals of creating a fully self sustaining MakerDAO that can take on everything the Foundation has been doing.? I consider this the first a 2021 priority goal.

Growth here is not a problem. Managing risk is, managing growth is, managing portfolio risk is, communication (both internally and with community) is, engagement is, protection of depositors assets is… etc.

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This is a conversation about future potential, not what we should do right now… Are we not allowed to dream about the potential of this space and what may some day come to pass?

What have you been doing to contribute to actionable results? From a fellow community member with limited resources I don’t appreciate the lecture. This isn’t the space for it.

If you want to talk more about the potential of NFTs in the future, this is the thread for it.

Not entirely clear from the OP.

Well then I will stick to the space allowed. Personally while I think ‘visions’ are important. I think there is an element of bandwidth saturation going on.

@Aaron_Bartsch easy enough for me to apologize for coming off as lecturing on this.
I am sorry. Hope you have a great day!

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Interesting idea but I’d prefer governance takes a wait and see approach. As others have mentioned, the illiquidity and volatility of NFTs makes them a poor collateral and I doubt we would achieve any diversification benefits from adding them as they are likely very highly correlated to crypto markets.

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There are several dimensions of traditional artwork evaluation:

  1. Author
  2. Creative approach
  3. Creative background
  4. The history of the artwork itself, etc.
    NFT sells high prices almost thanks to the creator’s reputation.
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I think the NFT vault is not suitable for us, and we don’t need to consider it for at least a year.

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I think my main worry is that liquidation markets are not ready for such an illiquid and hard-to-value asset. Nevermind valuing on the front end as collateral, how does the protocol limit losses when someone drops an NFT into it and cannot repay the DAI?

We liquidate the asset. As a DAO we have to agree on what kind of NFTs we’d be willing to take this risk on. Over time it will become apparent which ones will retain their value (either via royalty streaming, claims on real world asset NFTs, or globally recognized importance NFTs).

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