Former Coinbase engineers launch NFT lending platform with Coinbase funding

A group of four former Coinbase employees launched PaprMeme last week, a platform they claim is a better place for lending and borrowing against NFTs. That is, if you can understand how it works.

PaprMeme wants to make loans more widely available and cost efficient. Although NFT lending platforms typically stick to blue chip NFTs like CryptoPunks and Bored Apes, PaprMeme is accessible to a wider range of NFTs. These include CrypToadz, Miladies, Pudgy Penguins, Cool Cats — and even CryptoDickbutts.

The whole concept of NFT lending has become more popular over the last year. The idea behind it is that you can use an expensive NFT as collateral to borrow or lend money. But because NFTs are quite illiquid, this increases the risk for the lender. To account for this, taking out a loan is often expensive and requires a high loan-to-value ratio, meaning that you get less bang for your buck. 

Since its launch, the PaprMeme has seen $97,000 of loan originations, with 39 borrowers. The platform has seen 95 NFTs used as collateral with more than $100,000 worth of NFTs currently locked in the platform. It also claims a total market share for NFT lending for some of the smaller NFT collections, including Miladies, Loot and Tubby Cats.

The main downside is that it’s a pretty complicated idea. The protocol relies on a token that somewhat represents supply and demand for loans, and interest rates are variable based on the token’s price — which is affected by external trading and is influenced by the protocol itself. It’s quick to get a loan but takes a lot longer to work out how much it will cost.

Where did the idea come from?

PaprMeme founder and CEO Wilson Cusack said he came up with the initial idea of creating a peer-to-peer NFT loan product while working as a software engineer at Coinbase in April 2020. 

When Coinbase found out about it, he was asked if he wanted to work on the idea as a 10% project. This is where employees can spend 10% of their time working on innovative experiments.

"The project started out as a very wild DeFi science experiment that ranged into ‘this might actually work’ territory," Cusack told The Block.

By the time the first version of the product was finished, there was a range of other NFT lending protocols in the space and it was a less novel idea. Still, Cusack still saw shortcomings in the way platforms were typically trying to solve the problem and wondered if it might be possible to fix these issues.

In April 2022, the project spun out of Coinbase. The team comprised of Cusack, two other software engineers and a designer — all from Coinbase. At this time, they received a $3 million investment from Coinbase Ventures,  an investment which has not been previously disclosed. 

Over the next 10 months, the project went through many modifications and developed into PaprMeme. During this time, it took inspiration from a crypto project called Squeeth that provides leveraged ether investing with funding rates.

How does PaprMeme work?

PaprMeme developed a pretty complex way of enabling NFT-backed loans. For a more detailed look, check out The Block Research’s take on it here.

The core idea is that there’s a common token across the whole protocol that is used in every loan. The value of the token is supposed to increase or decrease based on how much demand there is for such loans. And it’s this changing value that sets how much interest is effectively paid on the loan. 

Here’s an example: If you deposit an NFT into the protocol, it will let you borrow up to 50% of that NFT’s floor value. In doing so, it will mint papr tokens worth that amount and you can withdraw them in papr or have them automatically swapped to wrapped ether. Later, when you want to pay back the loan, you have to pay back the same amount of papr tokens. But if you swapped them to other tokens and the price changed, then you might be paying more or less to buy them back — effectively creating a variable interest rate.

On the other side of the equation, those who want to lend their value simply swap their crypto for papr tokens. But again, they may gain or lose value depending on how the token’s price changes.

The whole point of the protocol is that it creates a supply and demand equation between those who want to borrow against their NFTs and those who want to lend their crypto. The protocol’s token represents this fluid balance.

The protocol has incentives that are designed to help the price reflect supply and demand on the protocol. However, these incentives may not be enough and the token could trade at a drastically different price than it should for the purposes of the protocol. This could be bad news for borrowers who could end up with much higher rates than they were expecting.

There also are other risks to the protocol. These mostly relate to oracles that update the protocol with pricing data, whether that’s to do with the papr token or NFT floor prices. Cusack said the team has taken some precautions for each of these threats, including limiting how quickly prices of NFT collections can change.

Users can be liquidated on the protocol if the value of their NFT falls below the collateralization requirements. When this happens, the NFT gets put up for auction at three times the maximum price for NFTs in its collection. This price then decreases 70% each day until it’s sold.