Investment Thesis: Insrt Finance• Tomás Thor Palmeirim • 7 mins read
Insrt Finance is building a layer of simplification and abstraction for NFT finance, aggregating yield-generating strategies into Yearn-like user accessible vaults. Both vault strategists and the protocol generate revenue via custom take rates from vault profits.
In an industry where yield is often correlated with inflation and investor dilution, real economic activity is taking place.
NFT secondary sales have a volume of over $70 billion to date (source: Dune), and NFT-as-collateral based lending has risen to over $400 million in less than two years (source: Dune). Recently, NFT AMMs such as Sudoswap have enabled users and projects to form liquidity pools and receive trading fees on a total volume of over $60 million during a three-month period (source: Dune).
Overall, the NFT DeFi space is flourishing with innovation. New NFT AMMs and AMM styled-platforms (such as the aforementioned Sudoswap, NFTX, and Danu on Ethereum, Hadeswap and Elixir on Solana), the increasing popularity of NFT lending protocols (NFTfi, JPEGd, Arcade.xyz, Pine, Drops, BendDAO, and more), as well as novel NFT derivatives protocols developing options and perpetuals (Putty, Cally, and NFTPerp), present a compelling case for protocols designed to leverage these new tools and services in a streamlined manner for its users.
Despite the current global markets lull, it is evident these NFT-related primitives are gaining traction and adoption among investors and speculators alike. However, access to and understanding of these tools is still quite limited, whether due to a lack of financial resources or a lack of knowledge among existing participants on how to use them.
A few of these hurdles include the high capital requirements associated with active management of an NFT strategy, such as transaction costs, prohibitive pricing of blue-chip collections, fragmented infrastructure, and limited protocol composability, as well as the high information asymmetry resulting from the clique-like nature of NFT communities and the lack of quantifiable alpha in the space. All of these factors make it difficult for retail participants to gain and maintain a competitive advantage without time-consuming regular monitoring and substantial initial capital.
Who will be crowned King of the Metaverse?
The growth of the virtual world, fueled by rapid technology advancements and social change, is shifting the popular perception and viability of the so-called metaverse. The acceleration of related trends, like those described by Jon Radoff in his article 9 Megatrends Shaping the Metaverse, such as the mainstreaming of virtual environments and relationships, the adoption of blockchain by the public, a growing demand for data sovereignty, the growth of low-code platforms, the rise of cybernetics, and more, are widening the addressable market for blockchain technology in the entertainment industry.
We believe that the current stage of NFTs, which is mostly focused on profile pictures, digital collectibles, digital fine art, and speculation, is an early one.
We are confident that over time, the area will develop more non-speculative digital assets and on-chain applications with better user engagement and consumption habits, similar to their current off-chain analogues, such as gaming and entertainment, and real-world assets.
The worldwide gaming market is expected to reach $321 billion by 2026. (source: PwC Global Entertainment & Media Outlook 2022–2026). In comparison, the global blockchain technology market is expected to reach $19.5 billion in the same period (source: BusinessWire). Of these $19.5 billion, 4.7% ($920 million) is attributed to GameFi, which is projected to grow to $2.8 billion by 2028 (source: Absolute Reports).
Recent developments, ranging from dedicated L2 blockchains to breakthroughs in zero-knowledge protocols, have prompted companies such as Microsoft, Tencent, as well as their subsidiary gaming studios and other established AAA gaming studios such as Activision Blizzard, Riot Games, EA, Ubisoft, Epic Games, and more to develop their own blockchain-based games and acquire studios and infrastructure in the space. From September 2021 to mid-June 2022, forty of the world's largest companies invested over $6 billion in blockchain firms (source: Blockdata).
Looking beyond the JPEGs, a brave new world
Real-world assets including real estate, fine art, and other physical goods, such as luxury products, will also benefit from on-chain representation. Information on provenance, transaction and maintenance history, are essential when dealing with these kind of assets, and the physical transport and storage of these high-value items incurs risk.
On-chain receipts of ownership are able to address a number of these problems and even enable novel methods of getting exposure to these assets, such as fractionalization, for users who lack the capital to invest in safer, more established assets.
Moving ownership of these assets to NFT-based solutions enables integration with smart contracts, reducing the need for intermediaries, enabling automatic execution of transactions, and potentially introducing new ownership models, such as split ownership with yield sharing, or purchasing a fraction of a property and sharing rent revenue with other owners.
While this still lacks a legal framework in most jurisdictions, overcoming these hurdles would enable whole new models of owning and trading these assets, many of which our industries are still mapping out.
By building the abstraction layer for the existing NFT financialization landscape, Insrt is well positioned to expand into these upcoming NFT verticals.
How I learned to stop worrying and love the vault
Insrt vaults, a set of user-facing smart contracts, are Insrt's answer to the growing complexity of NFT financialization. Insrt's vaults provide a one-click, set-and-forget gateway for users to unlock strategies that leverage a multitude of NFT financialization primitives, enabling easy access to the full potential of existing and upcoming NFT finance infrastructure.
We believe this solution, modeled after Yearn’s flagship product Yearn Vaults, will not only be attractive to users, but to other protocols and DAO’s as well. In fact, Yearn Vault’s largest depositors are other protocols which build atop of Yearn to provide novel services such as Alchemix, Gnosis Safe, Abracadabra, ElementFi, Spool, and Set Protocol, among others (source: Dune).
These structured products utilize a series of existing NFT finance primitives, starting with spot exposure, fee capture, yield harvesting, collateralization via lending, and spot appraisal. Insrt’s smart contracts wrap around these modular blocks, programmatically executing strategies that were previously only available by writing custom code, or manually executing each step in a number of different dApps and smart contracts. By doing so in an automated way for vault depositors, Insrt makes existing NFT-based yield generation opportunities available to everyone.
The composable nature of these wrappers enables a plethora of strategies, each with its own risk/reward ratio, opinion on market direction, and more.
Some Insrt products, such as Shard Vaults, will democratize exposure to blue-chip NFTs such as CryptoPunks by acquiring these assets for the vault and employing yield generating strategies such as borrowing JPGD’s stablecoin PUSd and farming its Citadel pool. If the price of the high-value NFT appreciates significantly, vault depositors can vote to close the farming position and sell the asset, distributing profits to its shareholders. These positions, typically vulnerable to exposure to de-pegging events and liquidation, are hedged by backstops and repayment pools grown by farming user deposits, monitoring of loan-to-value ratios, and a thorough analysis of historical volatility for balanced and safe strategies.
The vault flow is simple and similar to existing user-experiences on other yield-farming protocols, where users deposits valid assets and receive a token that represents their share of the vault, backed by the assets in the vault pool.
These tokens can then be traded, LP’d on platforms such as Sudoswap, or staked to acquire INSRT tokens. In some cases, these assets representing a stake of the pool carry governance rights which can be used to vote on strategy matters relating to the particular vault, such as risk tolerance, liquidation thresholds, or management issues relating to assets held in the vault pool.
While the team will design the initial vault strategies, assuring sound and well-researched approaches and the use of existing legos for the introduction of the protocol, the ultimate goal is to use this vault framework to enable Insrt users to create and manage their own vaults based on their bespoke strategies, incentivizing these vault designers with performance fees. Similar to Yearn Finance, these vaults and strategies are proposed and manually approved via DAO governance, with stringent standards including high-quality financial research and backtesting, before they are added to the interface. Additionally, these strategies will also be bound by the security constraints built into Insrt’s own wrappers and integrations. The team will incentivize participation in these governance decisions with funding and R&D resources.
While Insrt is initially focused on establishing market fit for retail customers, the team is aware of DAOs and organizations with large NFT treasuries. These large entities rely on unsophisticated methods to generate yield on these assets, frequently resorting to OTC deals on platforms like NFTfi and Arcade.xyz. Over time, Insrt plans to onboard these organizations, enabling them to offer their own specialized vaults and strategies that employ their treasuries and wrappers, while remaining open to all users. In exchange for a higher performance fee for the protocol and its stakers, Insrt plans to engage with DAOs to build tailored strategies for their assets, based on a particular risk profile or goal.
The protocol in the middle
In addition to user-facing solutions such as the vaults, Insrt is developing middleware to further increase its appeal not only to users, but also for other protocols who want to use Insrt’s wrappers and access its user base and liquidity. For instance, building integrations with platforms where the majority of both DeFi non-DeFi NFT volume takes place, in order to allow users to make their assets yield-bearing without leaving their favorite marketplace, custodial solution, or games.
We believe that minimizing user friction is essential for considerably expanding the total addressable market and liquidity of the NFT and NFT financial services sectors.
By building a layer of simplification and abstraction for NFT finance, Insrt Finance is poised to be the first mover in the space and provide equitable access to yield opportunities in the NFT space for all investors, regardless of their financial resources or understanding of the mechanics of the underlying primitives and services. As a result, the confidence and willingness of retail investors to gain exposure to this expanding market will increase significantly.
In addition, by executing on this vision prior to the release of the market for digital representation of real-world assets, the protocol will be well positioned to adapt and expand into these upcoming NFT verticals.
We believe that the Insrt team, with experience in the NFT, DeFi, and TradFi spaces from working at organizations such Drift, UXD, Solrise Finance, Deutsche Bank, Goldman Sachs, UBS, Merill Lynch, and Allen & Overy, is capable of executing on this vision.