Nick Emmons

## Intro

Upshot is entering the NFT lending space. By leveraging our appraisal models and new infrastructure built specifically for lending, Upshot will be launching managed NFT lending strategies. Our lending strategies use different methodologies that can appeal to a range of liquidity providers with different risk profiles. In this post, we’ll outline how our appraisals enable us to construct efficient portfolios of NFT loans, details into the new lending-specific models that we’ve built over the past couple of months, and how we’ll be bringing these lending models to market in the coming weeks.

## What Goes Into a Successful Lending Strategy

When constructing terms for NFT loans, it’s vital to understand the value of the NFTs you are lending against. The amount you loan against an NFT relative to its value is known as the “loan-to-value” (LTV). As a lender, if your LTV is too high, you are exposing yourself and your backers to undue principal risk. On the other hand, if your LTV is too low, you are leaving money on the table and will likely lose borrower interest to competing lenders.

This is where appraisals fit in. NFT appraisals give us a reliable in-the-moment estimate of the value of an NFT, allowing us to set loan terms that are competitive while mitigating our risk.

### Appraisals

Upshot's appraisals are among the most accurate and robust models for NFTs on the market. Every hour, over 74 Million NFTs from more than 67,000 collections are appraised by our ML models with industry leading accuracy (MAPE of 3-10% for our best-performing collections). It is these appraisals that are powering our lending strategies.

While appraisals are at the core of our lending strategies, we have built several other components that are essential to being a successful lender in the NFT space. These other pieces include forward-looking estimates of asset value changes (recovery rates), default probability estimates, and our risk management framework. A quick description of each follows:

#### Recovery Rates

Our recovery rate model calculates forward-looking estimates of NFTs’ value, which takes into account the current market situation and helps the lending strategy to predict the future collateralization of an NFT-backed loan. Without recovery rate estimates vs the current fair value (our appraisal) a strategist cannot estimate how much money they stand to lose when a borrower defaults.

#### Default Probability Model

Like TradFi credit providers, our models factor in the probability of a borrower defaulting on their loan. This model helps us to estimate the possible frequency and likelihood that the borrower misses an interest payment and assess the chances that we will have to liquidate the assets that we are left in possession of.

#### Risk Management Framework

Our risk management framework is where our concentration analyses occur and where we manage the number of collections we are writing loans against. This framework also takes into account the loan concentration per collection on other major lending platforms, ownership concentration per collection, our own loan concentration per collection, and collection concentration per wallet. By not only acting at an individual NFT level, but also at a holistic collection and market level, we can protect both liquidity providers and ourselves from any potential downsides.

The number of collections we lend for is also not fixed. When market conditions improve we are able to provide terms for more collections, but when there is volatility in the market our framework automatically scales down the number of collections we lend for.

## Striving for Breadth

Because of Upshot’s appraisal coverage, we are capable of offering relatively safe and competitive terms for dozens of collections. This is achieved by adjusting the collections we publish terms for based on our fair value estimates at the horizons we lend for. To decide which collections are suitable, we analyze the volume, liquidity, wash trading as a percentage of total trading, ownership and transaction wallet concentration.

The criteria that go into selecting collections are volume, liquidity, wash trading as a percentage of total trading, ownership and transaction wallet concentration, over multiple months, so that we lend for more stable but also diverse collections that do not suffer from and are less prone to manipulation.

## What’s Ahead

With this lending infrastructure and strategies in place, we will start to bring them online in the coming weeks. We will be underwriting loans directly on leading NFT lending platforms, but we will also be one of the initial strategists on Astaria when they launch. As an Astaria strategist, it will be trivial for anyone to get exposure to our strategies’ performance through the Astaria protocol. We will be releasing some more information about how our strategies work, the types of loan we’ll be underwriting, and more in the next few weeks.

Upshot has entered the NFT Lending space. Our lending strategies, which leverage our appraisal models and new infrastructure built specifically for lending, appeals to a range of liquidity providers with different risk profiles.

Introducing: Upshot Lending Strategies

About Upshot

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