SquiggleDAO Improvement Proposal
NFT Lending MVP
Author: NiftyFifty
Abstract
One of our goals as a DAO is to build the best and biggest collection of Squiggles. We are working towards that goal by doing open market purchases and OTC deals, but another way to keep building our collection is to participate in the rapidly growing market for NFT collateralized loans, focusing on Squiggles.
As an MVP, we plan to allocate 30 ETH to this project during Season Zero and reevaluate based on performance at the end of the Season.
Motivation
We would be interested in buying Squiggles at 20-30% below floor prices, hence we can offer short term collateralized loans at those LTVs. Let’s illustrate this with an example: If the floor is 10 ETH, we could offer a 30 day loan up to 7 ETH (i.e. 70% LTV, we could also reduce the LTV if we want to be more conservative). That way if the loan defaults, we effectively acquire the Squiggle at 7 ETH (not a bad scenario) and if the loan gets repaid, we receive our 7 ETH back plus a premium (which depends on the rates we charge).
This is similar to selling slightly out of the money puts in a very volatile asset we would like to acquire.
Typically the annual rates for these loans are between 50-100% and the maturities are between 7 and 90 days. We plan to offer loans up to 30 days to reduce market risk.
We can also explore an alternative strategy, instead of offering 50-70% LTVs and charging high rates, we could offer 20-40% LTVs and charge lower rates. For our mission, this strategy seems inferior as we would be acquiring far less Squiggles (although at much cheaper prices) and generating significantly less yield.
We will start using a basic model to calculate the maximum offers we are willing to make and we will develop and improve this model over time. The model will be something like: (1 month avg floor price) x (max 1 month drawdown) x (premium over that price we'd be willing to pay) = max amount we'd provide against Squiggles. We will develop a similar model to decide which rates we should offer.
As our main goal is to foreclose on Squiggles (and our secondary goal is to earn interest income), we will charge lower than market rates to win business.
We would start offering loans at NFTfi, currently the leading platform in the space.
It is important to mention that in Q1 2022, NFTfi will be launching its version 2. The new features include loans against NFT bundles, unlimited duration loans, loan extensions and renegotiations, etc. We will investigate and act with particular caution when using new features that can pose additional smart contract risk.
We need to decide how we are going to execute this program, having in mind both security and efficiency. Our initial idea is a multisig wallet run by the Treasury Squad.
Success Conditions
By offering loans collateralized by Squiggles, we accomplish three goals:
1) Acquire more squiggles - integral part of SquiggleDAO’s mission.
2) Keep building our brand and reinforcing our reputation by positioning SquiggleDAO as the main lender for Squiggles.
3) Generate some yield on our treasury.
Specification
As briefly outlined in the Abstract and Motivation sections, we plan to use 30 ETH to offer Squiggle-collateralized loans on NFTfi. The details are yet to be defined, but they will be similar to the below:
LTVs: 50-70% (according to our model)
Annual rates: 50-100% (depending on maturity and LTV offered - based on our model)
Maturities: up to 30 days
Launch Details
This will be launched with Season Zero. We plan to include it in the different Season Zero discussions, articles, etc. And make periodical announcements on both Twitter and Discord (first offers made, first loan started, first loan repaid, first Squiggle acquired, etc).
Costs
There is an allocation of 30 ETH to this program, but this will only be a use of funds if loans default.
Risks
As with any investing strategy, there are some risks involved:
Smart contract risk: the most important risk we are assuming. It is limited at least on NFTfi v1 as there has been $40M of loan volume during 2021 (with collaterals such as AB curated, CryptoPunks, Autoglyphs, etc.) with no issues.
Market risk: if the floor drops below our loan value during the life of the loan, we would be acquiring a Squiggle at a price above market. We will limit this by offering loans up to 70% LTV and up to 30 days.
Concentration risk: we will monitor who are the counterparties and will try to limit the exposure to any particular counterparty (or modify our offers to reflect this risk).
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.
Rewards
This could be a fixed role, a bounty or part of the Acquisition Squad responsibilities. To be determined.
