Strip Finance
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STRIP is, in essence, creating a marketplace where anyone owning a desirable NFT (as determined by platform parameters) can use it as collateral to borrow capital.
The asset pricing data on the Strip platform will be directly fetched from NFT marketplaces such as Rarible, Superare, Opensea, and Wazirx, all of which we will be partnering with. We will not be making any arbitrary changes to the pricing data. However, we will reserve the right to make adjustments to the valuation of the NFTs based on our own risk assessment.

Using an NFT as Collateral for a Loan

‌The value proposition for owners of NFTs follows the same principles in any lending/borrowing market. Having access to capital (loaned out against a collateralized asset) provides owners with access to liquidity for various ends, such as pursuing other investment opportunities, personal spending or hedging against market movements.
The possibilities of assets that can be tokenized via the NFT (ERC-720/1155) standard is limitless, with use-cases such as land deeds, art, certificates, digital domains, music & financial assets being a few.
‌Strip will provide owners of this asset class with access to capital to pursue other opportunities while still maintaining ownership of their coveted NFTs.

Matching Lenders & Borrowers

The critical element needed for the Strip platform to work is the matching of borrowers with lenders. In order to bring these two parties together in an effective manner, there must be both centralized & decentralized solutions for addressing two problems;
  1. 1.
    Valuing the NFTs: Art & Financial
  2. 2.
    Method of aggregating & deploying capital

Valuing Art NFTs- The Human Eye

‌Granted, art NFTs are unique and distinct works Often, an individual’s role is vital when assessing the value of these assets.
‌A fantastic example of this is the Hasmasks NFT project; each NFT is generated via code, but some NFTs have unique features that the program could not have predicted. In these circumstances, a program would have no idea of its value or worth because those individual elements are designed to be appreciated exclusively by the human eye. Therefore we have been planning on involving humans in this process.
‌We have identified a solution where a faster mechanism for lending out capital can be achieved. For this process, specific pools would have a more significant amount of liquidity (crowd aggregated) than what an average individual could provide. Given this efficient means of capitalizing the lending pools, a borrower will take an instant or flash loan. The amount of capital available for an instant loan will be the amount pledged by the underwriter in case of a default or sudden drop in the market price.
‌We are inviting NFT funds and studios to underwrite loans against NFTs on our platform. The funds/studios would either earn interest on their loaned capital if the amount is paid back on time or in case the borrower defaults; they stand a chance to get the NFT at 50–60% of the market value (i.e. the LTV underwritten would be 50–60%). In addition to providing capital for loans, we believe these firms would enhance the price discovery & valuation process, given their access to data and collective experiences.

‌Valuing Financial NFTs

‌The methodology of assessing the value of financial NFTs is more straightforward than that of art, granted the quantitative (not qualitative) nature of these instruments (they are derivatives of a project’s token/assets, not merely an art collectible). Therefore, the following non-exhaustive list of parameters would be assessed when valuing the financial NFTs (and subsequently the underlying token/asset of the NFT):
  1. 1.
    Debt duration & project age/availability of historical pricing data of the underlying token(older project, lower APR, ceteris paribus ). The main predictor of APR%.
  2. 2.
    Team, doxxed or not (no doxx, higher APR%)
  3. 3.
    Quality of partnerships (VC’s, other projects)
  4. 4.
    Exchanges listed on/liquidity (higher liq. + better exchange = lower APR)
  5. 5.
    Valuation of collateral
  6. 6.
    Revenue (platform fees)
(the following list is taken from the debt financing product outlined below, where the financial NFT is effectively a derivative of a token/asset)

‌Aggregating & Deploying Capital — Decentalized P2P Lending

‌One way of determining the value of the NFTs on the platform is to crowdsource the value assessment process. Individual lenders will decide the fair value of the NFT by the amount of capital & APR% they require for loaning out their capital (with the NFT as collateral). In addition, the platform will provide lenders with data points such as artist profiles, social media metrics and sales history to inform the price discovery decision making process.
‌In this scenario, the borrowers are limited in their ability to negotiate; they will have to accept or reject the offer. In addition, there will be a time limit within which the borrower needs to respond, or else they offer will be rejected.
‌The lender can propose an interest rate and duration, which transfers the NFT to an escrow when accepted by the borrower. If the amount due (principal + interest) is returned under the stipulated time frame, the borrower gets the NFT (collateral) back, or the ownership rights are transferred to the lender.
‌To initiate the lending process, the borrower will upload their NFT asset on the lending marketplace by selecting the asset from their wallet, entering the following information (terms);
  1. 1.
    Desired Asset Value
  2. 2.
    Capital Requirement (amount of money borrower is requesting)
  3. 3.
    Loan duration
  4. 4.
    Number of Installments (frequency of coupon or coupon+principal payments)
The Strip Platform will provide boundary recommendations (min/max parameters for terms) to help borrowers determine their desired terms.
‌The terms are then published on the platform, with lenders having access to the aforementioned information. The borrowers/lenders will have the option to accept/reject the proposals and subsequently the loans/transactions. We will begin with a simple offering, merely accept/reject transactions, with dynamic negotiations (bids/asks) planned for later on in the project development cycle.

‌Aggregating & Deploying Capital- Centralized Pool Lending

‌The second option for aggregating and deploying capital on the platform will be using capital pools. The Strip team and various partners will identify unique assets/offerings (NFTs) to collateralize and offer loans to individuals/entities on the platform (such as the debt financing product outlined below) while pooling the capital from lenders in a decentralized manner. We consider this method as “centralized”, as the offerings will be in a sense “curated”, with the risk and terms being underwritten by a centralized entity (strip finance & strategic partners).
‌In this product offering, the NFT holders/entities would submit a proposal to get a fair price evaluation & terms. Once the underwriters have pledged the assets, a fast lending option will be available to the borrower. In case of default, the pledged amount from the underwriter will be distributed to the pool, and the assets will be transferred to the underwriter.

‌No Different than Using Physical Art as Collateral

‌Physical paintings, sculptures, books, and other art mediums have been used as collateral for as long as humans have been making art. And using NFTs as collateral is no different. It fits a model closer to how pawnbrokers operate, although via more technological means.
‌As the NFT market grows and their value continues to develop, expect more lenders to accept them as collateral.

Liquidation Practices for Marketplace Lending

‌After each borrower commits to the loan amount, a loan package is created (containing terms such as # of installments, duration, liquidation terms etc.). Liquidation rules will be activated in the following scenarios:
  • No repayment
‌In case of no repayment by the borrower after an active loan package has been created, a Settlement Action will be created, and the lender will receive the NFT asset. After three missed installments, the lender will have the option to call the loan and complete the Settlement Action by receiving the NFT asset.
  • Partial repayment
‌A settlement action will be created in partial repayment by the borrower, followed by no repayment, and the lender will receive the NFT asset. After 3 missed installments, the lender will have the option to call the loan and complete the Settlement Action by receiving the NFT asset.

Penalties for Missed Installments

‌In the case of missed installment, the following rules apply:
  1. 1.
    A borrower that misses one installment will have to pay a penalty of 10% from the total instalment value. The penalty will be paid only once, and the penalty will be deducted from the installment value when they call the pay instalment function to pay the missed installment. If this is the last installment that must be paid, the borrower will be allowed to call the pay installment function for the duration of 1 more installment period. If the installment is not paid, the NFT asset will be lost to the lender in marketplace lending or the Strip Liquidity Pool in the case of pool lending.
  2. 2.
    A borrower that misses 2 consecutive installments will have to pay a penalty of 20% from each missed installment value when he calls the pay installment function to pay the missed installments. Suppose these are the last 2 installments that must be paid. In that case, the borrower will only be allowed to call the pay installment function for the duration of 1 more installment period after the last installment was expected to be received. If the installment is not paid, the NFT asset will be lost to the lender in marketplace lending or Strip liquidity pool in the case of pool lending.

Liquidation Practices for Pool Lending

In pool lending, lenders commit liquidity to a pool and the installments paid by borrowers are equally distributed to lenders. In case of liquidation, the amount pledged by the underwriters will be distributed back to the pool, and the NFT will be transferred to the underwriters.

Debt Financing Product for Projects/Teams

In traditional finance, companies can lower their cost of capital via debt & equity financing. In other words, to raise funds for development and capital investments, a company can either sell equity (stock), or finance through debt (bond/note issuance). The optimal mix of both (calculated via WACC, the weighted average cost of capital), produces a lower cost of capital (fundraising cost).
This is such a vital piece of financial infrastructure, and it is surprising how it has not been thought of/created already. This presents a massive opportunity for Strip!
As depicted above, the idea is straightforward. Assuming STRIP can underwrite a loan for a great project, as time progresses, the token value will increase. What we are doing is providing teams (of the project) to access capital now, rather than having to sell off a large portion of their dev funds to grow the project.
As shown above, if the price today is $1, and the team needs $10M, then they would have to sell 10M tokens (not a realistic case, just illustrative). If they can access capital today (via debt), then in the future, they can sell a significantly lower amount of tokens (1M [email protected] $10), paying back the principal with exponentially fewer tokens (and drastically lowering their development cost).
Additionally, this would significantly benefit communities, as there is no dilution/extra circ supply added (in the short term). The teams could also burn the remaining 9M tokens, causing a significant price increase/deflation.
As depicted above, the platform would work similarly to any other lending protocol. The caveat here being, we are providing liquidity/loans to an area of the market which has yet to be served, early-stage projects.
The following basic points will be considered when determining the APR%, and subsequently, the risk being underwritten :
  1. 1.
    Debt Duration & Project age/availability of historical pricing data (older project, lower APR). The main predictor of APR%.
  2. 2.
    Team, doxxed or not (no doxx, higher APR%)
  3. 3.
    Quality of partnerships (VC’s, other projects)
  4. 4.
    Exchanges listed on/liquidity (higher liq + better exchange = lower APR)
  5. 5.
    Valuation of collateral
  6. 6.
    Revenue (platform fees)
*Strip Finance & our underwriting partners will determine on a case by case basis which projects are eligible for interest-only loans (with the principal paid back at maturity). For all other projects seeking to raise debt capital, the payments will entail interest +principal payments/installments.

Strip Platform Revenue Model

The Strip Platform will primarily derive its revenue from the fees generated as performing a “facilitator” role of transactions between the borrower and the lender.
The platform will charge 1% of the loan amount fee from the borrowers for facilitating the transaction. This charge will be incurred at the time the bid is matched between the lender and borrower.
In addition to this, Strip Finance will also charge a 10% fee on the total amount of the interest to be paid.
The lender will pay the fee to Strip upfront at the time of the loan origination (creation), while the interest repayments will be made separately to lenders throughout the duration of the loan.
For example, let’s pretend that borrower “A” receives USD 1000 of the stable coin against their NFT as collateral as a loan. The proposed interest rate is 10% APR for a period of 1 year. This is how it would work:
  1. 1.
    The total interest amount to be paid back to lenders= $100 (10% interest rate on $1000 of loaned capital= $100). This will be paid throughout the duration of the loan in installments, or at the end of the loan…total to be paid back to LENDERS= $1000 principal +$100 interest = $1,100.
  2. 2.
    Strip Finance will take their 10% fee upfront=$10 (10% of $100 interest=$10), which means the lender will receive $990 as the total loan amount at the origination/creation of the loan (from the very start).
Again, the 10% Strip Platform fee on the TOTAL INTEREST paid back to lenders will be collected upfront from the Strip platform. This is separate from the interest payments to lenders.
As mentioned under Pool Lending, we will create liquidity pools. To incentivize participation we have an LP tokens program. On the other hand, there is also a penalty of 1% for the lender/ liquidity provider whenever the liquidity is withdrawn.
Any kind of platform charges mentioned above will be paid in the native utility token — STRIP.