August 30, 2022
Gabe Frank is CEO of Arcade.xyz, the most sophisticated DeFi NFT lending infrastructure. A third-generation pawnbroker, Gabe helped run the family business of 9 storefronts under the name Benny’s Pawn, founded in 1947 and eventually acquired in 2016. Through this real-world experience, Gabe learned the importance of collateralized loans against physical assets and developed and ran an online sub-prime loan portfolio. An early NFT enthusiast and DeFi advocate, Gabe brings expertise from consumer and traditional financial markets to Arcade.xyz, having previously supported BitGo growing their digital asset custody (AUC) to over $1B and assisted BitGo Prime in building an institutional lending book to over $150m. Later, Gabe joined Curv, where he introduced the first-of-its-kind institutional Metamask product built for DeFi hedge funds and fintechs.
Julian: Hey everyone. Thankyou so much for joining. We have Gabe Frank here, CEO and founder of arcade.They run an NFT liquidity marketplace that helps you borrow and lend againstvaluable NFT assets. Gabe, thank you so much for joining the podcast. Really excitedto learn more about you and, and what you got going on, but just to jump rightinto it.
Julian: What were you doingbefore you started Arcade? .
Gabe: Yeah. So before I wasat arcade, I was working in the crypto industry for about four years at twodifferent startups. One was a custodian for institutional like hedge funds andexchanges and banks and fintechs. So that custodian held Bitcoin and Ethereumand other cryptos for these large institutions.
Gabe: And, and that's reallywhere I met kind of the entire crypto industry met the big players. Mm-hmm thelandscape of crypto learned about different projects and, and how everybody wasusing crypto mm-hmm . So that was like a really good education and entranceyeah, into the digital asset world for me.
Gabe: And then after that, Iworked at a different crypto startup called curve. Mm-hmm ended up beingacquired by PayPal. About eight months, eight months after I joined. And thenthat's when I got into NFTs and started collecting and realizing that I couldbuild something yeah. In this space that had some impact mm-hmm
Gabe: And oddly enough,before, before I entered crypto, I was, I was in a family business, workingwith my dad in a chain of pawn shops in Texas. So I was actually lendingagainst like physical, non fundable assets, like Rolexs and diamonds andelectronics and tools, kind of anything guns. And, and yeah, we, my dad endedup selling that business that got acquired and, and then that's when I got intocrypto.
Julian: Wow. That that'sgreat. It seems like you were kind of already running with the NFT space beforeyou even jumped into actually the digital assets, but why NFTs? What, what kindof interested you about those that, you know, those smart contracts inparticular versus, you know, other you know, blockchain protocols, tokens, andall the other, you know, players in the landscape, you know, what, what, whatabout NFT has got you?
Gabe: Yeah, so I wasinvolved in it all like Bitcoin, Ethereum yeah, different using different protocolsin DeFi. And then in 2020 I got involved in this, this project that was usingNFTs, like one of the first ones mm-hmm . And I started collecting these thingsand getting, like, getting really interested in some of the artworks that are,that were being minted as.
Gabe: Yeah. And it was likereally cool to own something online that was actually digitally scarce. Mm-hmm, mm-hmm and I'd never been like an art collector in real life, but doing itonline where you actually have direct ownership and, and, and a piece of whatthe artist created. Yeah. As your own IP, I thought, I thought this would be anew asset class and, and the industry would grow and NFTs would capture.
Gabe: You know, billions ofvalue going forward. And so, and so yeah, it was like opportunistic and it justfit well with my background and kind of understood the market. Yeah,
Julian: yeah, yeah, no, it'sinteresting. I just went to the there's an NFT conference in LA here and it wasamazing what the artists were doing, but I was also thinking about like, man, Ifeel like it's such surface level scratching the surface on the, the technologyand how you can.
Julian: Utilize it. So, youknow, in, in regards to what you're doing at arcade, tell me a little bit aboutthe borrowing process. You know, what is it to borrow against an NFT? Cuz Idon't, I don't know if a lot of people kinda understand the concept and how to,to utilize kind of that, that component of it if you own, if you own one.
Gabe: Yeah, definitely. So,you know, if somebody owns an artwork on chain, which is an AFT it could be anartwork, it could be a profile picture. Like a board ape or a crypto monk.Yeah. Really these things are today. They they're like digital country clubs.They're like intern they're like passes to digital country clubs and there'senough collective value behind these assets that there's secondary bids on themarket.
Gabe: So basically we canvalue these assets provide a valuation to the borrower. And then they simplylog on, sign into the DAP with their, with their web three wallet. Mm-hmmselect which assets they want to use as part of a loan mm-hmm . And then theydeposit into the, the protocol mm-hmm a lender funds the loan and they get themoney and the, the NFTs get locked up into our protocol.
Gabe: So really what, whatwe built was this like escrow and settlement system. So that NFT, so that wecould enable liquidity against, you know, this, this big new asset class Andyeah, so a couple clicks and, you know, people have borrowed, you know,millions of dollars with on their sort of monkey
Julian: Yeah. their monkeypictures. That's hilarious. What who, who are the lenders? Who, who are youworking with that takes these, these assets and then allows and lends outcertain, you know, amounts of money to the
Gabe: borrowers. . Yeah, soit's definitely like a crypto native audience mm-hmm. So we have a lendernetwork that we work with.
Gabe: That's a mix ofinstitutional lenders. Mm-hmm retail, lenders, and crypto, like Nexo is a biglender in our platform. Yeah. Dows high net worth individuals. Really, we, webasically open it up to the entire world. Anybody who wants to be a lender cannow lend against these assets in a decentralized.
Gabe: But we do have a letternetwork that, that, you know, they're crypto native and, and, and they at leastknow what these assets are and how they can be valued.
Julian: Yeah. Do you, do youthink this, this is gonna change or just add another way to borrow money, youknow, in, in lending, in the future?
Gabe: Definitely. I mean, Istill think of our protocol that we're building as like infrastructure yeah.
Gabe: For this new. Webthree economy. Mm-hmm like we had one use case for borrow was he, he got a loanagainst a board date and he used it as a down payment for a house that he wasoh, wow. So I, I, it is sort of like this alternative Like ecosystem buildingmm-hmm that that's probably not gonna be integrated into the mainstreamfinancial ecosystem.
Gabe: Sure. Anytime soon.Sure. But these like new web three rails are, have billions of, of volume aregoing through these protocols that it's, it's becoming like too big to ignore.Yeah. So I do think, you know, web, you know, web free on chain payment railsand settlement and escrows is eventually all gonna happen on chain with theseprotocol.
Gabe: How, how
Julian: far out do you thinkin terms of years or months or any amount of time will it be in the kind ofmainstream way to borrow and lend you know,
Gabe: well, I think if NFTscontinue to capture value, like right now, the market cap of lendable NFTs islike five to 10 billion. Mm-hmm and there's been about 500 million in loansagainst NFTs.
Gabe: So it's still a reallysmall asset class, like compared to other asset classes. It's a niche industrywithin crypto. Yeah. So I think we're, I think we're five to, to seven yearsout. Yeah. For these protocols really to be used by the mainstream where likemaybe you have a bank that's plugged into a protocol in the back end and, andbanks become just front ends for yeah.
Gabe: On chain protocols andall this activity. Yeah. So there's a lot of benefits that, that come withusing like protocols and web free rails, which is transparency. Transparentcollateral mm-hmm it's everything's on chain, like loan term, term sheets,master loan agreements. It's all, it's all handled by the blockchain.
Gabe: And so it mm-hmm, iteliminates the need for a lot of these intermediaries. Right. And and yeah,it's pretty cool.
Julian: When, when you, whenyou say intermediaries what do you mean if you could define it? Well is, is itlike, you know, if I'm a borrower. You know, in a traditional sense, doesn'thave an NFT or doesn't have an asset to stake for, you know, some kind of loan,you know, and I'm going off of credit score and, you know, income and thingslike that.
Julian: That kind ofinformation who is intermediary in that sense, versus if I have the asset and Ican just borrow against it. What, yeah, I, I guess I'm, I'm curious on, on whatthe intermediary means in particular.
Gabe: Yeah. So basicallywith our protocol We we're the company that developed the protocol, but wedon't actually have to custody and take possession of any of the assets thatare used as collateral mm-hmm
Gabe: So it's all governedby the, the smart contracts themselves. Yeah. So, you know, we've done about 26million in loans without the need for a bank or for ACH or for you know, creditchecks. It's, it's all just based off the collateral itself. That's sitting inthe wallet, that's connected to the da the, to the applic.
Julian: Wow. It's I wastalking to another founder about, you know, kind of the, the evolution the NFTswe'll see, one theory I have is that it's, it's gonna be used as just likeverification for documents. You know, like I have my birth certificate as a NFTin a smart contract. And that was my unique, authentic, you know, birthcertificate that can't be manipulated or changed or anything like that.
Julian: Are there other waysoutside of our and documentation that you see NFTs going and, and being usedfor?
Gabe: Yeah. So I, I thinkyou're right. NFT is one of the benefits is the provenance. Yeah. So you canalways, you can always backtrack like the chain of custody of, of any assetthat's on chain, if it's an NFT there's other verticals like financial NFTs.
Gabe: So you can, you canbasically make, you can wrap an NFT. You can wrap NFT technology around anybasically asset and put it on. So for example, we did a loan against a Rolex,an enroll life Rolex that was minted as an NFT. There's a company that takespossession of the fiscal assets. Yeah.
Gabe: They keep it safely.And then they min an NFT on chain that represents the ownership of that asset.Yeah. For the first time you have a real Rolex loan, like Rolex liquidity beingused within DeFi. Yeah. So I think we'll start to see these different types ofuse cases with NFTs. Like right now it's.
Gabe: Profile pictures andart and kind of these monkey pictures. Right. But it's the beginning of a big,like a, a broader cultural movement. That's that's being captured within onlinecommunities. Like no way before NFTs before crypto could online communitiescome together in an organized way. And basically build economies around.
Gabe: Mm-hmm the culturethat they have online. Mm-hmm so now that's kind of what NFTs represent, but Ithink we're in one. And what NFTs, like use cases will be used for. So it'sstill all being
Julian: explored. Yeah. If, ifyou're someone who say like isn't as involved in the NFT community and thecrypto community and things like that, but you do.
Julian: You know, the assetsto purchase one of these unfundable assets. Where do you go? Where do you kindof start in conception to then enter this broader community ofpossibility?
Gabe: Yeah. It's so it'snot, and that's one of the challenges of crypto and FTS and DeFi it's, it'schallenging if you're not really native to this space.
Gabe: Mm-hmm . So the firststep is like crypto Twitter. That's where all of crypto lives is like onTwitter. So it's good to follow. Creators project founders like developers hopinto discords of, of different collections that you're interested in. Find outwhat they're talking about. Like figure out who, who the players are and, andalso how to keep the assets safe and in your own custody.
Gabe: So the first stepwould be like crypto Twitter, then jumping into a discord. Yeah. Looking atopen sea at like all the cool art and, and profile pick stuff that, that peopleare dropping. And and yeah, just like getting involved in the community in anyway and talking to talking to these online communities.
Julian: Where do, where do youfind your space? Like, I don't know if you've, if, if I'm sure you're moving inthis direction or maybe you haven't, I'm not sure, but it seems as the webthree is really going to this virtual world in this, you know, kind of the, themeta and everything's kind of going and being utilized within that.
Julian: Do you find you know,do you, do you grow in that space as well? Do you kind of have you focused ondifferent you know, features or assets that can be involved? I'm I'm alwaysjust curious on how companies are thinking about being involved in more of avirtual world, as it seems like it's an impending feature for all of us to beinvolved in some kind of online virtual.
Gabe: Yeah. It's, it's, it'sinteresting. I mean, people, people sit on like online all day. Yeah. talkingto different people all over the world. Mm-hmm and now you're seeing peoplecome together with similar interests, similar hobbies, like similar likes.Yeah. And they can find sort of their community online.
Gabe: And now a way to beinvolved in that community is to like buy. An asset, a profile picture that,yeah. That is like an entrance to this community. And so, yeah, it it's likereally cool. It's like people feeling like they're on a team, like they're partof something bigger. It's a way for individuals to socialize online.
Gabe: in a way that youknow, is has some economic mm-hmm impact also. Yeah. So yeah. It's like cultureand finance kind of coming together.
Julian: Yeah. Yeah. It's, it'scrazy. You know, you touch on community as well because yeah. I feel that everycompany is now moving into the direction of community, finding some way to notonly build a product or server, that's going to benefit their consumer, butalso.
Julian: I don't, I don't knowif it's some kind of loyalty, but it's like an ecosystem where it's like aperpetual motion machine, you know, once you kind of push it one direction, itcontinues to move and grow and expand. What, what ways are you pushing kind oflike the community mind or, or have you thought about the community mind interms of, you know, your, your company and your business as a way of expandingyour, your reach to your audience?
Gabe: Definitely. I mean, Ithink one of the aspects of web three and DeFi protocols is that. They they'reintended to be community owned and governed protocols. Yeah. So instead of likea centralized company capturing all of the value happening on the protocol iteventually is dispersed and distributed to the, to the users of the protocol.
Gabe: So the users of theprotocol are the owners of the protocol eventually in web three, and then theycan vote on the governance and development of that protocol. And that's reallythe paradigm shift in web three is. You know, now you have a Google or anAmazon and they are capturing all the value mm-hmm that that their services areproducing instead of the users themselves.
Gabe: Yeah. Yeah. So on webthree, it's the users that own the protocols via tokens that they own andcontrol the governance and developments. And the roadmaps of the protocolsmm-hmm so it's, it's like really a paradigm shift. And I, and I think that'show it's gonna be with these online communities.
Gabe: They're gonna be usersof the protocols, and they're also gonna be owners of the protocols and be ableto decide on direction that the, that the development takes.
Julian: Yeah. Yeah, no, thatthat's, that's definitely, you know, I, I feel like that's. In a lot of ways,the huge benefit of, of the spaces being able to influence where the protocolis going to move.
Julian: And also being thatyour feedback almost like, you know, in a democratic sense where, you know,your vote kind of counts in terms of the direction, your use case, and it'sgonna evolve and mold around wave. That's actually useful. Cuz I feel like, youknow, as at a certain point, a lot of C. Get so far removed from their consumerand it's even more difficult to stay in tune on the ground level on what, whatthey want to what the consumer wants out of their experience, their service,their product.
Julian: So it's interestinghow the community kind of already, you know, and by nature offers thatexperience and that evolution. But back to back to the, the lending andborrowing aspect, cuz you know, the question that I had that, that popped backinto my head is when I'm, you know, I have a digital asset I borrow against Iborrow against it and have a lender.
Julian: Is it like a similaryou know, loan process where there's a certain percentage that the lendermakes? Like what, what is, what does that experience look like? Is it anydifferent or is it just a new form of borrowing against you know, an. .
Gabe: Yeah, for sure. Sohave you ever been to like a pawn shop and got a loan at a pawn shop?
Gabe: It's it's very similarto that model. Mm-hmm so you take a Rolex or a diamond, you take it to pawnshop, they appraise it. And then they lend a percentage on, on that appraisevalue mm-hmm and if the bar doesn't come back to pick up that asset, then thepawn shop keeps it and they can sell it and then recoup their problems that.
Gabe: So in the same way onarcade, a borrower comes to the app. They list their item that they wanna get aloan against. And a lender just comes and looks at the collateral. Pretty muchlenders know what these assets are valued at. They have their own like pricingmetrics that they use, but basically they click a few buttons.
Gabe: They fund the loan,the asset gets locked up into escrow. And if the bar doesn't come back, thelender can claim the asset and, and. Got it. And then he can sell it in themarket to recoup his principle. Got it. But if the borrower comes back, he paysinterest and then, you know takes out the collateral from the escrow and it'sback in his wallet.
Julian: Got it. So it does it,you know, in terms of the borrowing process, does it rely on the interestthat's paid back to the, the borrower or is it like what you said? Is it apercentage of that asset? So I have this fun non fungible token it's worth saya hundred thousand dollars excuse me, random numbers here.
Julian: And I want to borrow,say 10 K from that. Is there an interest on that that the lender or theborrower has to pay back? Or is it just that, that principle of 10 K that theyhave to pay back? Or is it kind of something just like unique to, to theircertain situ. .
Gabe: Yeah. I mean, it'stypically there's interest involved, so like loan to value ratio saying assetis worth a hundred thousand depending on the type of collection, like if it's aboard ape or crypto punk mm-hmm or an, a block like squiggle den.
Gabe: There will be apercentage of that value that's used for the loan. So say an assets worth the ahundred thousand. They might get a loan for 40,000, for 30 to 90 days at a 20to 25% APR. That's kind of the average terms happen right now. Got it. Sothey're fixed term short duration loans
Julian: Got it. I know youmentioned you know, someone used it as a down payment for their for theirhouse, but what other ways are, are people using these loans to yeah, toborrow
Gabe: against. . Yeah. Sothe other reasons are like leveraging, like simple leverage. Like you have anasset mm-hmm you wanna buy more assets, you get a loan on it and you buy moreassets.
Gabe: Others are likeopportunistic plays within the market. Mm-hmm so I have an asset that's worth alot of money, million bucks. And I, I see a play that I want to trade mm-hmm soit's comes down to capital efficiency. At that point, you get a loan on yourliquid assets and you invest it else. The other one, the last one is a hedgemm-hmm
Gabe: So if you own anexpensive asset, you take out a loan. You're basically hedging your downsiderisk on that asset. Mm-hmm it's like buying it's like buying a put option.Yeah. If the, if the value of the collateral drops. Beneath the market price.Well, the bar doesn't have to come back to pick up the loan now the lender'sunderwater on this asset.
Gabe: Yeah. And so in thatway, it's sort of like a hedge downside hedge for the borrower. Yeah.
Julian: Yeah. What, tell me alittle bit about the traction you're facing. You mentioned so far you've beenable to do I think 500 million or was it 28 million in terms of borrow. Interms of loans with, with arcade what, who are you working with in terms ofmaybe institutions or individuals?
Julian: Tell me, tell me alittle bit about your attraction. I would love to learn like where thecompany's going in, the direction
Gabe: it's going. Yeah,definitely. So, so we went live with our, our V one last January mm-hmm and wedid about 25 million in loan volume. Against high value and FTS. We just releasedour version two of the application.
Gabe: Yeah. Last week. Andso in this last week, we've done about a million in loan volume against like 40apes and mute apes and punks and some art stuff. So in total, it's been about26 million of loans. In an industry that, that the total amount of loans ever,ever written against NFTs is like half a billion, 5 million.
Gabe: Wow. Yeah. So there'sonly a few big, you know, there's only a few players that actually have builtthis, this infrastructure to enable this type of activity to
Julian: happen. Yeah. What aresome risks that, that you're facing right now within the space? Is it, youknow, the fact that it's new, is it, is it, you know, reaching a broaderaudience?
Julian: Is it people adoptingthis technology? Tell me a little bit about kind of what, what keeps youup.
Gabe: Yeah, definitely. Imean, I think the whole, everybody building in crypto is at risk to the market,completely falling underneath them. Yeah. yeah. You know, so, so there's alwaysprice risk, like market risk. You know, we're building, we're buildingbasically a new, new infrastructure.
Gabe: That's web three,that's built on smart contracts and code. So code is money and yeah. Yeah. Andso you know, users that, that actually are using these DeFi protocols there'salways gonna be protocol smart contract risk. Yeah. You know, there's also. Youknow, for lenders there's risks that the collateral just drops in value.
Gabe: Yeah. And they're,they've made bad loans, but, you know, thankfully most of the loans are, all ofthe loans are over collateralized. Yeah. So the lenders are somewhat protected.But yeah, I mean, such a new like niche industry there needs to be moreawareness, more education and the NFT market cap as, as a whole industry hasto.
Gabe: Yeah. So, you know,we're betting on NFTs, capturing trillions in value in the next, you know, fiveto 10 years. Yeah. And with that, like loan volume will also scale. So we're,we're trying to get ahead of that.
Julian: Yeah. That's awesome.And, and so long term vision for the company, if you can, if you can wrap it upon, on where you see not only arcade going, but maybe where, where it it'sexpanding to.
Gabe: Yeah. So right nowwe're, we're a centralized entity. That's developing this. Protocol, right.Mm-hmm eventually it's, it's progressive decentralization such that thecommunity is actually building and governing the protocol mm-hmm . And so withthat comes a governance mechanism, which is usually, you know, a token thatthat's released as part of the application.
Gabe: So. so it's like afine line of between like we're building a product and we're building aprotocol that, that we hope is used by millions of people in the future. Yeah.And so yeah, that's what it takes. It's just like, you know, we're, we'regrinding now to get our name out mm-hmm to be a trusted and, and, and sort ofcategory leader in what we're doing.
Gabe: Yeah. And gettingready for that next hockey stick movement, which you know, is, is probably afew years out. But
Julian: yeah. No. I love thatman. Bonus question. I always like to ask my guests to help. Not only give mesome homework but also help individuals find their own inspiration, but whatbooks or people, or I guess communities influenced you the most?
Gabe: Yeah. I love thisquestion. I think a couple books like changed my life completely. One of 'emis, is writing without bullshit. Never heard. It was just about like businesswriting, how it's, you know, you know Basically cutting out all the bullshit.Yeah. And
Julian: sorry, there's a lotof background noise.
Julian: No, you're good.
Gabe: got it. Yeah, so thatwas a book for like people in business sales that can get ahead in theircareers by writing in a much better way. Yeah. So that book really changed mylife. I also like Robert Green, who wrote like the human laws of nature, 48 lawsof power. Mastery mastery.
Gabe: Yeah, yeah, exactly.Yeah. He's one of my favorite artists, so that I think he had a big impact on,on my life. And, and yeah, I just read a bunch of other business books youknow, stuff from different entrepreneurs you know, books about venture capital,how to raise it, what, you know, all that stuff.
Julian: So, yeah. I love that,man. Well, thank you so much for joining the show. I really appreciate, youknow, your, your experience and learning more about the space and, and howyou're getting your name out and a little bit on that. How can we get involved?How can we know more about arcade and know about the community that you'rebuilding?
Julian: Where can we findyou?
Gabe: Yeah, definitely. SoI'm on Twitter all day @stanleycrup. I have a, a, a crypto punk with a bluebend down. That was my profile picture. We also have a discord arcade, discordthat you know, we have our community that's engaging. Discords basically ouronboarding channel for the product.
Gabe: Awesome. And yeah, I'dsay Twitter and discord are probably the best places to reach me out.
Julian: Perfect, man. Well,thank you so much for joining. I really appreciate you having you on the showand yeah, I hope to get you more. I'd love to get more involved in your projectand get more people aware of, of what you're doing at arcade.
Gabe: Awesome. ThanksJulian, appreciate it. Really