NFT-backed lending, with Nuno Cortesão
Pawnshops are one of the oldest forms of lending, allowing people to turn assets they’d like to keep for the long-term into cash in the short-term - granny’s broch, those statues great uncle Thomas brought back from Greece, your Bored Ape Yacht Club NFT. OK, one of those is not the same as the others, but our definition of ‘asset’ is changing, so where do holders of digital assets go if they want to access quick cash but they don’t want to sell?
Well, maybe to Zharta, “a real-time NFT loan platform for borrowers and lenders”. Zharta allows consumers to get instant loans with their NFTs without losing ownership over them. Join me and Nuno Cortesão, their CEO and co-founder as we talk about NFT-backed lending and where digital assets might go in the future.
Zharta is found at https://www.zharta.io/ Or on LinkedIn and the other social medias (Twitter, Discord, and the ones for kids cooler than me)
Zharta was speaking at Web Summit earlier this month, and I expect they will be back at the event again next year - certainly, I will be. If you would also like to attend, I suggest you jump on this link for the last few 2 for 1 early bird tickets. You'll also hear that Nuno and I will both be at the Rugby World Cup in France, so let me know if you're heading to either event, and maybe we can grab a drink.
We also speak about traditional pawnshops, which were featured on episode 31 of this show with James Constantinou (check it out to see how unique physical assets are evaluated and used as collateral)
You can learn more about myself, Brendan le Grange, on my LinkedIn page (feel free to connect), my action-adventure novels are on Amazon, some versions even for free, and my work with ConfirmU and our gamified psychometric scores is at https://confirmu.com/ and on episode 24 of this very show https://www.howtolendmoneytostrangers.show/episodes/episode-24
If you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.
Oh, and if you’re in need of more banking podcasts, you can find related content at https://blog.feedspot.com/banking_podcasts/
Regards,
Brendan
The full written transcript, with timestamps, is below:
Nuno Cortesao 0:00
Lisbon, and Portugal indeed, it has, I believe, 10 unicorns. We have this massive inflow in the last years of talented people coming here. And I believe that created a snowball of innovation.
It's a leap of faith, becoming an entrepreneur. It was a very big decision when we decided, let's stop our corporate jobs to create this idea that I believe that has lots of value, inspired by traditional banking and lending against stocks - we realised that it would make perfect sense to build this technological financial solution for a new type of asset that is being underserved.
Brendan Le Grange 0:45
I've worked in consumer lending for 20 years, spread across three continents but kept quite closely to the unsecured space. And where I've strayed into secured lending, it has been into the traditional segments of that where the collateral is a house or a car.
But that doesn't have to be the case. In episode 65 of the show, I spoke to Phil Blows of ByBrix, who are collateralizing mortgages with cryptocurrency. Hold on to that for a minute, and now cast your mind even further back in time to Episode 31 where I spoke to James Constantinuo of Prestige Pawnbrokers, they back loans with hard to value and unique assets, like art.
Now combine those together. Welcome to How to Lend Money to Strangers, with Brendan Le Grange.
Nuno Cortesao, everybody has heard the term and probably has a reasonable idea of what it means, but in reality, what is an NFT.
Nuno Cortesao 1:57
So NFT it's the new buzzword that fits everything in the same basket.
In reality, it's digital objects that are registered into the blockchain on a immutable way, that you can easily transact to other peers, and that has specific unique properties.
NFT's can range from collectibles - so image and that's kind of the use case that pops in everybody's mind - but then can open the door for innovation for completely other examples. We have financial NFTs, positions in the blockchain that represent financial positions like property rights.
We can have something in real life, we can create the tokenization of that, right, embed it into the blockchain in basically create a register or a patent. And then we can have very big range of applications you can have, for example, a ticket for an event, a soccer game can be NFT. So we have a digital object that represents the ticket that is assigned to someone or to some position, and then I can easily trade it in the market in the future.
The future is very big for this new type of digital assets.
NFT's have been around for a while. They started as we know them in the public blockchain. They started with ERC-721, but in the digital corporate worlds, since blockchain emerged, the concept of digital objects with specific properties, they elect a very good semantics or a very good word and everyone just grabbed the idea 'ah, it's an NFT'.
Now it's easy. Everything that's a digital object that's on the blockchain, that's not a cryptocurrency, it's an NFT.
Brendan Le Grange 4:05
Nuno, I asked you about NFTs because you are the co-founder and CEO of Zharta, a startup that allows NFT owners to access loans instantly without having to liquidate those digital assets. That's a very modern take on secured lending that I wouldn't necessarily expect to be coming from a traditional banker - so what is your background?
Nuno Cortesao 4:29
I'm a mechanical engineer, we are three founders on Zharta and we are all engineers, though we have different paths or different routes. I became a consultant, worked on functional strategy consulting, then worked with machine learning for fraud detection in the banking industry, worked around gamification, and then, around 2016, I got engaged with blockchain.
I love the concept of started going into the rabbit hole building corporate products using blockchain, doing multiple proof of concept around loyalty, around tokenization, and factoring. So very interesting and cool stuff around the earth.
And then I was talking with my co founders. And we realised that there was an opportunity here to pick up the NFT space, that was building and creating intrinsic value assets, assets that were being valued by the communities. And we realised that the financial ecosystem for these new digital assets was just a greenfield in reality, it was ready for disruption, it was ready so that we could build products to fulfil the needs of those assets and the users that total those assets.
And so we came up with the idea to build a solution to create liquidity models by providing loans using the NFTs as collateral.
I worked a lot on blockchain, Diogo also lead an entire blockchain department, it's an application startup that competes with Google Play and stuff like that. And Diogo, after that, led the blockchain division of MercedesBenz.io and so we, both of us, we have strong, deep expertise in the blockchain space.
Pedro worked as a senior project manager on Bosch and also Avian, so very strong on infrastructure. And so the three of us we have this strong, traditional backgrounds, and we came to this entrepreneurship path because we realised that we could build something more connected to whom we were.
It was inspired by traditional banking. In traditional banking, there's lots of lending against stocks - it's typically a good product when you have a good portfolio or when when you are connected with the bank. And we realised that it would make perfect sense to build this for for this new digital asset. And so we engaged on this idea, we started bootstrapping the concept, ideating.
In talking with some users, interesting things just popped out of this work. We started getting some traction, and now we are already live with our solution.
Brendan Le Grange 7:16
Yeah, well, let's talk about that. So six years in the blockchain, you're obviously in the forefront of digital assets space, you knew that really well. But then you moved into entrepreneurship to actually build Zharta - what has that been like, the last year and a half actually trying to get the business off the ground? What have you learned? What have you experienced?
Nuno Cortesao 7:34
It's a very big difference. It's a leap of faith to becoming an entrepreneur. It was a very big decision when we decided, 'okay, let's stop our corporate jobs'. I told my mom, 'mom, I'm stopping a very stable job to create this idea that I believe that there's lots of value that can be built for the future'.
And so the challenge became completely different. You start working, the three of you in the room, then everything starts to happen - so you have the different pillars that have to exist in a company, in a startup. You have HR, you have accounting, you have finance. At the same time, you are trying to deliver product that you don't know if if it makes sense, because you are trying to get product market-fit. At the same time, you start looking for fundraising, because unless you can nail the first the first nail correctly, you are able to bootstrap only for a while.
So everything starts to work like a circus, everything is running at the same time. And you have to ensure that you need to find exactly what you are going to place your focus because you have very limited resources, you have to be completely abstracted from everything that is not critical.
And so the first barrier as a first time founders was the courage of telling our idea to everyone. And that's typically the number one mistake of founders - we have done it also - is that you have an idea you have a product that you want to launch but then you think 'I'm not going to tell to someone because maybe they can steal my idea'. And then after when one year of being building starter, we realise that ideas are easy, delivery is the harder part.
And so that path where you start telling everyone, getting feedback (good and bad), and you realise what you have to improve what you have to change what you have to do well because you are already performing well.
And so it has been a very big challenge with lots of ups and downs, but a marvellous journey I was in try this for nothing in reality. I am always saying to everyone that I know that start saying I have I would love to be able to start up I say go start. It's, it's wonderful. You are going to learn so much. It's very hard to get the same experience and the same multitudes of opportunities and challenge in the corporate world.
Brendan Le Grange 9:57
And adding a four month old baby to the mix, just to keep it exciting!
Nuno Cortesao 10:02
All three of us we had babies during the kickoff of Zharta!
So it has been very, very complex to have the experience of being a founder - first time founders, of course - and then also the experience of being, at least me and Diogo, first time parents. That was like, a very big cocktail of emotion that we have been shaking around.
Brendan Le Grange 10:25
Yeah. And you're, you're doing that building of data out of Lisbon, Portugal. Now, that's your home, oo obviously it's practical in that sense, but you're not the only startup out of Portugal these days. In fact, there seems to be a growing hub of FinTech and just tech startups.
Why do you think so many founders today are choosing to build their businesses out of Lisbon or out of Portugal?
Nuno Cortesao 10:49
So Lisbon, and Portugal indeed, it has, I believe, 10 unicorns created by Portuguese people, just to give a ballpark. But we are only 10 million people. So in reality, we have one of the highest unicorn per capita of Europe.
The last 10 years, there was a very big inbound of talent. So with the cost of life, how safe is the country, cultural fit, weather, the majority of parties speak English - at least in the main cities in Lisbon or Porto - if you shake all of these pillars, Portugal becomes a very interesting for digital nomads to come here.
I believe that there are also some financial/ tax advantage. You have very low taxes on capital gains on crypto. So we have this massive inflow in the last years of people coming here to work as a digital nomad, and building products creating talent - they start saying to other people that this was a nice environment to build qnd that has created a snowball of innovation.
So in the past, my wife was always bugging me, 'oh, let's go to another country, I want to have more international experience'. In the past, for sure, we should move around from Lisbon, now it's the place to be, like everyone from bloackchain and Web3 is coming here.
It has the right condition, so let's stay here, and build.
Brendan Le Grange 12:16
Me, I've only been briefly as a tourist and the weather, the food, the drinks there, the beaches, the the towns, it's got everything - so even if you're just considering it, I suggest go and visit!
Nuno Cortesao 12:26
Don't forget, it's very different to be a tourist and to be a local, okay, there are always problems and bureaucracy and things sometimes don't move so fast as other country - so some some caveats, if you want, but it's a very good country to be.
Brendan Le Grange 12:42
Yeah, well, let's leave that there and loop back to where we started with NFT bank loans. In practical terms, what is it that Psalter is doing?
Nuno Cortesao 12:51
In a nutshell, we built a solution that is fully noncustodial, we build a solution that works on top of smart contracts: the users that have NFTs deposit the assets on the smart contract, and they are entitled to receive an amount of a loan based on on the value that is being deposited. We help to calibrate the system by working with appraisal systems that we built and appraisal systems from other parties, so that we can have a good view of the ecosystem as an all in there are a set of conditions with the users that's requesting the loans beforehand.
So they know that they are going to get a fair loan that is completely transparent. They know if they do the payment of the amount that is due, they will receive always the assets, the underlying assets, back.
So all of these rules are coded in terms of the smart contract and creates a very lean operation. To provide the loans we use a set of lenders, the lenders deposit funds in beforehand. And then those are the funds that will empower the loan and make the system to work. I like to call it an asynchronous marketplace. It's not a marketplace, per se, it's not a peer to peer directly where someone's going there and request a loan and someone goes there to underwrite and provide the loan, we help to create a more scalable solution in this way.
Brendan Le Grange 14:12
It's a bit like, maybe, lending against art - where if I have an NFT, I bring it to you, you will evaluate it using your models and tell me it's worth X amount of Etherium and then that's what I use as security for a loan. And I'm borrowing that in cryptocurrency as well, is that correct?
Nuno Cortesao 14:32
Exactly. So it's full based on non-custodial and full based on crypto.
You bring over the NFT, there is an evaluation, there is an underwriting, a set of rules, a duration for the loan. So I don't know how familiar you are with AVI or Compound or solutions that are more defi. There, if for some reason the collateral/ the asset loses value overnight, the borrower gets liquidated. Here we have a more you human-centric approach, we provide a loan with a due date or a duration, so that the users can pick up the loan to perform the actions that they want to do with the money, there is always a target in mind, they do the operations, they repay the amount that is due, and the system works very easily on this line.
The cool part is that everything is on top of smart contracts so that we are never the owners of the loans, per se, or the assets.
Brendan Le Grange 15:29
As you say, an asynchronous marketplace.
So then if I was on the other side of that, if I want to lend some money, then do I see the menu of our valued NFTs and then choose which one, I'm willing to back with a loan?
Nuno Cortesao 15:42
No, it's more on a yield farming experience.
So you have a set of funds, you have a lending pool that's issuing different loans against different assets, and so you have like exposure to different collections. So funding all the borrowing that is generated on the other side.
Of course, past results never guarantee future results, but they do give you a ballpark - what's the expectation for each learning pool, and then you deposit your funds. And then you come back when you feel that the moment is right. And you are able to withdraw the funds with the premium that you received in the interest rates that you received based on the time that your capital was working.
Brendan Le Grange 16:19
Yeah, and I guess that takes out some of that volatility, that from the borrower's point of view, they don't have constant margin calls to say the price has gone up, the price has gone down. So they've got that stability.
And likewise, from a lending point of view, you pooling the assets so if one particular NFT loses its value, you're protected, because you're exposed to multiple.
Nuno Cortesao 16:41
And even when they lose the value, there's something critical, there is always the recovery of part of the of the loss.
Brendan Le Grange 16:49
And I think it'll be worth exploring as well.
Let's say I've put down an NFT of mine, and I've borrowed one Etherium, and my NFT loses its value, I assume I'm still bound by that smart contract? So I'm still paying back the loan anyway, the the collateral is there to encourage me to pay as a backstop if if I default, but it doesn't affect the validity of the contract, I'm still paying back that loan. So as a lender, of course, I feel a little bit more nervous if the NF T's disappeared in value, but I'm still owed that money, right, I still have the loan income coming in so often in this space.
It's that volatility that's the problem, the ups and the downs that make people nervous. Whereas here, there's still the actual loan in the traditional unsecured space. So it is perhaps more secure and more stable than I guess, at first thought if you think about leaning against NFTs,
Nuno Cortesao 17:45
Exactly, I'm going to start bringing you in random so that they can pitch for us because that was the best summary of our solution!
In reality, that's basically what happens. You are able to tackle the volatility by the performance in the exposure to several agents. And then when people are on bear market, typically they need more efficiency of operations. So they use these kinds of solutions more than we are on bull market, they have higher assets with better and better values. And so they also use these platforms because they want to create opportunities. So it's a very neutral solution.
Brendan Le Grange 18:25
Yeah. And as you said, that NFT umbrella covers a lot of things, including tickets for big events. I've just been buying tickets for the Rugby World Cup next year and it's a it's an absolute nightmare.
Nuno Cortesao 18:36
I booked our tickets for the Rugby World Cup for next year already.
Brendan Le Grange 18:40
Maybe we'll see each other. Yeah, and there's the old style of tickets, I just don't work anymore, do they? So yeah, I can definitely see that there's a lot of space in the future.
And it's quite interesting. I spoke to a pawnbroker and they lend against art, against luxury cars, against jewellery. And they've got to work through this process of valuing all of these assets, each one's individual, but it's something somebody's holding, and they want to keep, but they also want to use it to access loans.
It's the oldest type of lending brought now into this very digital asset space where where people can turn their digital assets into loans in cryptocurrencies - so at the front edge of 1,000s of years of tradition, which is always fun to see.
So Nuno, if I as a traditional bank, I think about the space, you know, it's got a lot of things I don't understand. I got to employ all sorts of people I don't know, because it sounds very different to what I'm doing. And then I might think, well, but how big is the upside? Is it worth the effort?
How big is the industry?
Nuno Cortesao 19:37
So compared to investment banking, we are not on that level yet. I saw a presentation on Smartcon, it was one quadrillion dollar in obligations and stuff like that. I don't know how many zeros there are in one quadrillion.
But regarding the numbers on the ballpark of the space, just so we have an idea - and this in US dollars - the NFT space, as a class of of assets, it's more or less valued between $20 to $25 to $30 billion. Somewhere around that niche. The industry of defi goes a little bit higher, between $70 to $100 billion. The crypto space has $1 trillion in cryptocurrency overall. So more or less the ballpark numbers of the space regarding NFT lending from the top players, the top players are having on unlocked value per month, around $70 to $80 million, which is a considerable given that this whole market kind of kicked off one year ago.
And the growth for the space is 30% to 40% monthly. So it's a very nice opportunity. JPMorgan predict is $1 trillion, for the metaverse only, by the end of this decades. Citibank just released a paper, I believe today or yesterday, where they predicted the metaverse has assets and all the complementary products around it, between $8 and $13 trillion.
The banking industry is going to play a role and a part in this, okay, everyone's going to have a piece of the of the pie. But the processes with defi tools are going to become very lean. And so even big banking and corporates will have to reinvent themselves if they want to tap into this, the corporate machines that they hold, the institution itself, can be very heavy. And so when you are competing with solutions that can be fully automated end to end, it creates disruption that they will have to accommodate.
It's the space to be kids nowadays, the youngest generations are going to value the digital assets the same way that older generations value tangible physical objects. So it can't be ignored, because it's going to be a complete new disruption.
Brendan Le Grange 22:00
Where are you in the process? You said you you've been testing, you are only weeks away from launching, what is Zharta up to at the moment and what's on your horizon for the next few months?
Nuno Cortesao 22:10
So we went to two phases of testing to deploy our prototype, created our first initial solution, and we got feedback - like it makes sense, does it work, what's your opinion, what can we improve what doesn't make sense. And we got into a second prototype, way more robust, we got the second phase of testing with that testings, we went into test net solution, this is typical of the Web 3 journey, okay, when you are not forking or creating contracts that are already existed, typically go through this process of doing some local testing, doing test net testing, that is testing with blockchains, that that don't have monetary value and where people can play around in test the solution to extreme in then you go to main net.
And now we are on that phase where we started onboarding the first users.
So we are on soft rollout, we got initial users that wanted to test the solution that wanted to be in the forefront, people that loved to test this new solution. We onboard them, they have already performed someone's success. So now we are going to launch the solution. Things are moving really quick. And our goal now is to ensure that we start to customise the features so that it makes perfect sense for the users. I'm a user, every other user because I started all this journey because I have nfts that I wanted to unlock value to use. You're saying NFT's we can kind of restart again, on the beginning.
We are on the tip of the iceberg. We have no idea where this is going to end.
There are more financial vulnerabilities swap positions where you have a financial position inside of a blockchain defi solution and that's already an NFT - we can start creating composable product, Metaverse opportunity. It's endless the level of opportunities here, and it's going to need to be fueled with credit. It makes perfect sense to deploy.
There are other companies exploring complementary products to ours working around insurance working around loan resales. So lots of different companies are trying to tap into this market and to understand what they can build that can, in the future, be one of the pillars of the ecosystem.
Brendan Le Grange 24:36
Yeah, I mean, as you said, anything could happen from here - calling back to Portugal's history as great explorers, exploring new crypto lands now instead of the world!
Nuno, you were in New York at Smartcon. Are you on the road talking anymore? Or where can people go to see what you're doing and to maybe try and wrap their heads around some of these new applications they haven't explored?
Nuno Cortesao 25:01
We at Zharta, are going to be speakers in the Web Summit. Web Summit is one of the major events here in Lisbon this year, they have a very strong crypto track and web 3 tracks. And it's going to be super interesting. We are there to showcase a little bit of our solution to give a grip on the NFT landscape. It's something that's very appealing for people from the tech world to understand.
We are going to Bogota, next week, because it's going to be the DeFi - the major trends on the web three ecosystem are typically announced on this kind of conferences, typically there is a very long tail into the mass market. And so when we are building solutions for niche, we have to know exactly what are their solutions that are being built, until we have been around doing in identifying what are going to be the next trends. What are the partnerships that we should mobilise to, to bring more value to the client.
Brendan Le Grange 25:58
Yeah, and if people are just wanting to sort of go to the website, have a look maybe at the assets there and the loan structures, where can they go to, to do that sort of exploration,
Nuno Cortesao 26:10
Very easy, just go to www.zharta.io
And that can lead the baseline to explore the solution. Now during this phase of of soft rollout, we are still doing some integration and onboarding of the users case by case by case so that we can deploy the solution on a on a very controlled way that makes sense. But then we are going to open to everybody in the next next month, you just need a wallet. That's all there needs to use our solution.
Regarding documentation. We have already deployed some documentation and we are working a lot on that. Probably when this goes to the air, it's going to be that the documentation is already live - but Zharta.io is the place to start.
Brendan Le Grange 26:53
Yeah, I'll put that in the show notes ( and it's Zharta 'Zh' 'arta' '.io').
But yeah, I'll put the links down there and the links to everything else. Yeah, thank you so much for your time, I think that's really interesting to see where unique small acid bank loans have come to from from the days of putting your prized it family heirloom up for some money at the pawn shop or things like that all the way through now two years smart contracts and digital assets and crypto based loan. So for me exciting to see which direction we go from here, as you said, tip of the iceberg stuff.
Nuno Cortesao 27:27
I think that the key is to bring the the approaches that are here for millennia, but in reality, cross them also with the new technology. We don't have to have centralised banks performing all these kinds of operations or pawnshops, as we have in the past we can have this retail approach it is going to be a very interesting exploration that we are doing in other companies are going to explore the market also in bring completely marvellous solution.
So we are super excited in reality, on top of the innovation dream on top of building the next frontier for finance, it also has this deep meaning of helping people that work with different rules typically don't have access to banking. If we look into the most Western countries, this now is a niche product for very specific purpose. But in the future, we will have people on countries where this kind of solutions, help them maybe to fulfil the dreams that they have, it can be life changing.
It's something very fulfilling in reality.
Brendan Le Grange 28:30
I think even people with no interest in getting directly involved in the space would benefit greatly by having a look and thinking a bit about which direction is going and what this could mean in the future just in terms of the the setup and the flow, and the customer experience.
So I recommend everyone go and click that link and go and have a look at zhart.io and see what you're doing there. And yeah, by the time this comes out, either be right at the end of the testing stage or maybe even live. So yeah, thank you very much for your time, and good luck for the rest of the growth.
Nuno Cortesao 29:02
Thanks so much, Brendan. was a pleasure to be here.
Brendan Le Grange 29:05
And thank you all for listening. Please do look for and follow the show on your favourite podcast platform and share the updates widely on LinkedIn. Plus, send me a connection request while you're there.
This show is written and recorded by myself Brendan Le Grange in Brighton, England Show music is by Iam_wake, and you can find show notes and written transcripts at www.HowtoLendMoneytoStrangers.show
And I'll see you again next Thursday.