Arcade.xyz Protocol Lab: Flash Rollovers

At Arcade, we’ve spent the last few months building Pawn Protocol, the future of NFT collateralized loans. In the months since our private launch, we’ve seen borrowers unlock millions of dollars of liquidity from their valuable NFTs, with lenders generating healthy organic yields on both stablecoins and ETH. As we grow the protocol and expand our market, we’re committed to continuing to develop new ways for users to make the most use of their NFTs.

One new innovation we’ve just built is a flexible way of rolling over your open loans using flash liquidity. Imagine you want to leverage your NFT to gain additional market exposure — say, to invest in a token you like. You can use the existing protocol to take out a term loan at a given interest rate — say, 90 days at 15% APR.

Once the loan is originated, you deploy your funds into your favorite low-cap gem. Fast-forward 89 days: price is up bigly, sellers have run out of tokens, and Hsaka only just started tweeting your charts. It’s been a great trade with a lot of upside left, and you’re ready to ride this baby into the citadel.

But your loan is coming due, and now you need to close out your tab or lose your NFT. What do? Sure, you can sell your position, close out the loan, get a new one, and rebuy. But this is suboptimal: selling not only creates an unneeded tax obligation, but you just know there’s a god candle lurking in the shadows, waiting until the exact moment you sell.

Enter flash rollovers: using other people’s money to pay back your loan. Think of it as a bridge loan, a short-term capital infusion to pay back the original loan at minimal cost. With pre-approval from your lender, you as a borrower can use our Flash Rollover feature to pay back your old loan and roll over into a new term without having to close out your positions, only paying accrued interest.

How do we do this? Via the magical composability of DeFi, we take the following steps:

1. Take a flash loan from AAVE for the amount your loan is due
2. Pay back your old loan using the flash loan proceeds
3. Issue you a new loan (using a signature from your lender as evidence of pre-approval)
4. Use the new loan proceeds to pay back the flash loan.

As the borrower, you are only on the hook for the accrued interest (decided by your borrower), flash loan fees (minimal — $900 for each $1mm borrowed), and gas fees (this operation is intensive, and may consume around 1mm units of gas — similar to Convex staking). If your lender approves, you can even pull more principal out of the loan, or extend the loan term — full refinancing capabilities on deck.

In the future, we’ll be investigating less expensive sources of flash liquidity (such as running our own capital pool), more flexible refinancing options, and even transferring rolled over loans to different lenders. These features are all in service of our mission to be the most innovative and comprehensive suite of tools to unlock liquidity from your NFTs.

With rollovers, loan proceeds can be used to build long-term positions, and your collateral NFT can provide utility for as long as you need it. This level of composability, flexibility, and support for different assets is something that’s only possible thanks to the DeFi foundations built by earlier giants.

The protocol for flash rollovers is already live, and will be the first features built into the application after our upcoming public launch on January 25.

In summary:

• Arcade offers liquidity for your NFT in the form of a collateralized loan backed by your asset.
• Loan terms can be rolled over with lender approval, enabling you to borrow indefinitely and grow your liquid capital.
• Our rollover contract means that open positions can stay open, fees remain minimal, and refinancing and updating loan terms is easy as pie.

Thanks for reading. Make sure to follow us on Twitter, join our Discord, and visit our website. Until next time, happy aping!