MetaStreet v2: Automatic Tranche Maker (ATM🏧)

Introduction

MetaStreet’s v2, or Automatic Tranche Maker (“ATM” or 🏧), is an NFT lending protocol that utilizes user defined tranches within a broader pool of capital to enable economies of scale without centralized oracle or governance dependencies.

The protocol is entirely permissionless (any type of collateral can be supported), oracleless (users choose their risk tolerances independently) and capital efficient (users’ individual preferences are pooled together to offer a single “market rate’’ to borrowers).

In the following article, we will cover:

• the protocol design (tick design, share accounting, origination integrations, and interest rate model),
• offer a brief comparison of the MetaStreet ATM versus other NFT lending designs,
• a walkthrough (with visuals!) of the in-app lender experience.

Protocol Design

Overview

The MetaStreet 🏧 enables NFT lending via tiered pools of capital. Lenders deposit funds into tiered pools, which are instantly available to a borrower.

The capital pools themselves are specific to a single NFT collection (or subset of tokens within a collection), and exist on top of infrastructure called “thick ticks” which contain information about each pool depositor’s risk tolerances.

These thick ticks provide the framework for capital to be stacked into tranches and prioritized such that borrowers can always source liquidity with the most favorable terms possible.

Thick Ticks ↔️

The MetaStreet ATM utilizes “thick ticks” to enable users to define the specific risk profile at which they are willing to deploy capital, all within the same price space. Each tick carries three unique parameters — price, term and fee tier (defined below), and is capable of supporting an infinite number of unique depositor addresses.

1. Tick Pricing: When a lender decides to deposit into the MetaStreet ATM, they must decide the maximum price per NFT at which they are willing to lend. Different lenders will have different risk tolerances, and therefore indicate different maximum prices. A set of ticks at the same price are deemed a “tranche”. The protocol will route to the 10 highest priced tranches in order to fill a loan.
2. Tick Term: The second decision a lender must make when using the ATM is the maximum term at which he is willing to lend (at the price he selected). Lenders can choose between three term options — 3, 7 or 30 days. A chosen term is an expression of risk tolerance — longer terms are inherently riskier than shorter terms. The protocol will seek to match the term requested by the borrower with an equal term offered by a lender, but if none exist it will choose the next closest term that is greater than the requested term. (Note: a 30 day tick may end up with exposure to 3 day loans, but a 3 day tick will never have exposure to 30 day loans.)
3. Tick Fee Tier: The third decision a lender must make is the fee tier at which he wishes to lend. Lenders can choose between three fee tier options — 10%, 30% and 50%. Fee tiers are expressed as annual interest rates, though a lender will not necessarily earn the percentage rate as indicated by his fee tier — in addition to a stated fee tier, tick utilization and interest allocation will impact the return earned by the lender, as further explained below. In order to reward lenders willing to offer funds at lower fee tiers, the protocol will route to lower fee tier ticks over higher fee tier ticks within the same tranche.

Tick Routing via “Priority”

In order to create a loan for a borrower, the MetaStreet ATM must route liquidity from the 10 best ticks at the proceeds level desired by the borrower. Lenders in the same tick will share rewards equally.

Lenders in different tranches will share rewards disproportionally, with higher priced tranches earning an outsized share of the interest income relative to tranches at lower prices (and with any tranche below the 10 highest priced tranches earning nothing).

Finally, ticks within a tranche (ie, at the same price) with different terms and fee tiers will compete directly with each other, with higher fee tiers earning nothing until all lower fee tier ticks are depleted of liquidity. The lowest fee tier with the duration matching the Borrower’s preference will be depleted first, then backfilling in ascending order of duration, then on to the next fee tier, etc.

To help the lender decide which tick to deposit into within a tranche, the lender interface includes a “Priority” metric when making his decisions.

• A Priority rating of 1 implies that your tick will be the first selected in the next originated loan.
• A Priority metric greater than 1 (such as 20), implies a greater distance (implied # of loans) before your tick will be filled.

Tick Spacing & Minimum Deposit Size

In order to avoid tight clusters of ticks causing inefficient capital allocation, the creation of a new tick must satisfy the requirement of being at a price greater than +/-10% of the next closest tick.

Any tick without sufficient liquidity to cover its share of a loan (ie, “dust ticks”) will be excluded from the loan router.

Share Accounting

When depositing into a tick, a lender is effectively buying shares in the tick, which represent the lender’s pro rata claim to both the cash and loans being held in that tick. The price at which a lender buys shares reflects an “estimated value” per share, while the price at which a lender can redeem his shares for cash at a later date reflects a “realized value” per share.

• The “estimated value” per share includes all of the cash and principal value of the loans in the tick, plus half of the interest of all of the outstanding loans in the tick.
• The “realized value” per share reflects only the cash and principal value of the loans in the vault.

The reason for the difference in pricing when depositing versus redeeming shares is to prevent lenders who are buying shares of outstanding loans to receive unearned interest, and prevent lenders who are redeeming shares from receiving interest income that hasn’t actually been paid out yet.

This methodology is similar with MetaStreet v1, though simplified from many buckets into just two buckets (0–50%, 50%-100%).

Redemption and Rebalancing

When a lender wants to redeem shares in a tick in exchange for cash, his shares will convert at their “realized value”, as explained above. Depending on the cash vs loan makeup of a tick, a lender will either be able to instantly withdraw his cash from the tick (if the total cash in the tick is greater than the value of his position) or will enter into a redemption queue (if the total cash in the tick is less than the value of his position) and wait for the outstanding loans to mature.

While a position is open, a lender can also partially redeem or add more cash to his position. Alternatively, a lender can rebalance his position, from the currently selected tick to a higher or lower priced tick within the pool, or a different term or fee tier. As when withdrawing, the lender will face the same constraints when rebalancing (realized value per share, redemption queue when cash available is less than the size of the position).

Third Party Integrations

Similarly to MetaStreet v1, the MetaStreet ATM utilizes the composable nature of NFT promissory notes created on p2p lending platforms in order to aggregate lending volumes on these platforms.

Lenders who deposit into MetaStreet ATM pools are aggregating lending volume to have the best distribution possible for their funds.

Interest Allocation

While all ticks have a quoted fee tier, the interest earned per tick will nearly always vary from the quoted fee tier, similarly to how a Uniswap v3 fee tier has little correlation to the actual yield earned by an LP.

When a borrower requests a loan, they will see a single offer consisting of the most optimal 10 ticks at the price and term they desire. This might include some 10% fee tier ticks, some 30%, and some 50%, resulting in a blended APR to the borrower of 15%.

While the fee tiers drive the blended rate paid by the borrower, the blended interest income of the loan is reallocated to the chosen 10 ticks according to the formula 2^-n (normalized by tick height), where “n” is the tick number, in descending order from highest price to lowest price.

Consider the below example, with deposits priced as high as 15 ETH (with a 50% fee tier), 10 ETH (with a 30% fee tier), and 6 ETH (with a 10% fee tier). For a borrower to access a 15 ETH loan, he would pay an APR of 28.7%.

This interest income will be split across the 10 participating ticks with a disproportionate share going to the highest priced ticks, as shown below.

While this is the specific earning potential per tick for this specific loan, each tick’s true yield will reflect the weighted average yield across all loans in which it is participating, diluted by the unutilized cash in the tick.

Finally, a user’s specific yield on his deposit will also take into account the time at which he deposited (and the price per share he paid at the time of deposit).

MetaStreet ATM vs P2P and P2Pool

Fundamentally, there are aspects of both the peer-to-peer and peer-to-pool lending designs that are superior to their counterpart, which is why a number of offerings have sprung up in both verticals.

The value proposition of the peer-to-peer design is security and breadth of coverage at the expense of capital efficiency, while the value proposition of the peer-to-pool design is capital efficiency & simplicity of user experience at the expense of security (oracle dependencies) and narrow coverage (only top collections whitelisted).

The MetaStreet ATM is designed to provide a solution to NFT lenders and borrowers that takes the best of both P2P and P2Pool designs — pooled capital (efficient), instant borrowing (easiest UX), permissionless (full breadth of coverage), secure (no oracles).

Lender Experience

Depositing Capital

For lenders, the decision on where to deposit your capital in the MetaStreet ATM can take many different paths, depending on the strategy being pursued and the current market conditions.

Practically, a lender’s decision begins with choosing a pool for an NFT collection (or subset of tokens within a collection). After deciding which collection to lend to, the lender decides the price at which he’s willing to lend, as well as his desired fee tier and loan term.

The app’s UI will instantly tell the lender whether his decision results in a high or low likelihood of his capital being utilized.

Position Management

After depositing, a lender can manage his position directly in the lender interface — monitoring utilization, effective yields, and risk relative to current floor prices.

A lender can choose to redeem and withdraw his position, or redeem and rebalance to a new tick within the pool (ie, if he wants to move his position’s price up or down, or fee tier / term higher or lower).

Collateral Auctions

In the event that a borrower does not repay his loan by the maturity date, the collateral is released from the escrow smart contract and put up for auction on MetaStreet’s native auction platform.

Auctions begin when the first bid is placed, and are designed as fully on-chain English auctions.

When bidding, a user can navigate to the Auction UI and monitor the status of his bids, as well as the status of the auction in question.

Auctions last 24 hours from the initial bid, and any bids within the last hour of the auction will extend the auction by 1 hour.

Conclusion

The MetaStreet ATM was designed to address the shortfalls in current NFT lending market designs, with an ultimate goal of decreasing costs to borrowers and increasing returns to lenders (possible to accomplish both goals only by increasing overall volume).

The protocol will begin to be tested in closed alpha on May 15, 2023 by whitelisted users.

If you’re interested in joining the closed alpha, or have any questions about the design or protocol generally, please join our discord — https://discord.gg/metastreet.