Betting that Mega Mutant Apes are stronger together, one collector has made a risky leveraged play on the blue-chip NFT collection.
Fragment, a three-person company “creating rich stories and worlds for the metaverse,” took out a 1,000 ETH loan, worth about $1.3M, on Tuesday to purchase Mega Noise, one of the rarest NFTs in the Mutant Ape Yacht Club collection.
The collateral? Two other Mega Mutant Apes that Fragment will lose should it fail to repay the loan within 90 days.
Crypto lender Nexo provided the ETH at an annualized interest rate of 18%.
“APRs [in NFT lending] are abnormally high,” Kiril Nikolov, a member of Nexo’s NFT lending team, told The Defiant. “The main reason is that this product is not mature, so there is limited demand and limited understanding from lenders on the collateral, its risk and how to hedge it.”
Fragment’s founder, who goes by the pseudonym ptm, told The Defiant he understands the risk he’s taken on.
“A lot of folks that are building in the NFT space wouldn’t be in this space if they weren’t comfortable with some amount of risk,” he said. “I would not be honest if I didn’t tell you it gave me some anxiety to click those buttons to make [the loan] happen.”
Bored Ape Derivative
Mutant Ape Yacht Club is a profile picture-style NFT collection spun off from Bored Ape Yacht Club, the most valuable NFT collection by market capitalization. Both Mutant Apes and Bored Apes have become status symbols, with the cheapest in each collection worth almost $60,000 and $110,000 respectively.
Even rarer Apes exist, however. Of the 30,000 Bored and Mutant Apes, there are a dozen or so Mega Mutant Apes, each worth several times their run-of-the-mill brethren. Last year, Yuga Labs, the creator of Bored Ape Yacht Club, airdropped “mutant serum” NFTs to Bored Ape holders.
“Exposing” one’s Bored Ape to the serum created a new Mutant Ape, a process that destroyed the serum but left the original Ape intact. But there are several tiers of serum. M3, of which there were eight, is the rarest. Bored Apes exposed to M3 serums generated the Mega Mutants, and the serums are almost as valuable as the Apes themselves; one M3 serum sold for more than $2M in January.
With the purchase of Mega Noise, Fragment now has five Mega Mutants, which it’s been collecting for a secretive multimedia project titled “Applied Primate Engineering.” Ptm addressed the purchase of Mega Noise and his ambitions for Applied Primate Engineering on Twitter Wednesday.
NFT Lending Gains Momentum
The loan, while unusual, is part of a broader push to put NFTs to work — to make the illiquid, hard-to-price assets useful in the broader DeFi ecosystem.
Peer-to-peer NFT lending platform Arcade facilitated the deal. Arcade co-founder Robert Masiello told The Defiant that NFT lending protocols function like brick-and-mortar pawn shops, where someone might take out a short-term loan against a vintage guitar or a Rolex watch.
NFT trading volume is down more than 80% since its all-time high earlier this year, according to data from crypto analytics firm Nansen. Nevertheless, Arcade is having one of its best months, something Masiello attributes to greater awareness of NFT lending platforms in general.
Fragment’s loan isn’t the largest Arcade has facilitated. Earlier this year, Nexo loaned 1,200 ETH — worth $3.3M at the time — to an anonymous borrower who posted a pair of rare Zombie CryptoPunks as collateral.
“When we saw this happen on the platform, we were like, ‘Wow, I can’t believe people are even moving these things,’” he said. “If you were to think of our protocol as a bank vault or something, it’s like … they handed us the Declaration of Independence.”
Ptm said he chose to take out a loan out of fear he might miss the opportunity to purchase Mega Noise.
“The idea here is, we have some stuff in the pipe that will generate real revenue over the next few months that we will use to pay [the loan],” he said. “This happened because I’ve had a relationship with the lenders for a long time. … And we were just talking and I said, ‘Man, I think I’m going to miss this opportunity … and in a few weeks, we sort of made it happen quickly as sort of a bridge loan, if you will.”
Ptm said those revenue-generating projects will be announced within the next few weeks.
Given the risk that an NFT collection might lose its luster, Nexo is wary of accepting NFTs — even Bored Apes — as collateral.
“If it was only up to us, we would not take the directional risk of the Ape going to zero, even though we don’t think that’s likely,” Nikolov said.
Nexo found a solution by pairing up with “hedging partners” willing to take that risk.
Should Fragment fail to repay the loan, Meta 4 Capital, Nexo’s hedging partner in the Mega Noise purchase, will make Nexo whole and take ownership of the pair of Mega Mutant NFTs used as collateral.
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“They play the role of liquidator on our behalf,” Nikolov said.
Nabyl Charania, managing general partner at Meta 4 Capital, said he was eager to play that role.
“From our perspective, it’s a very safe deal,” he told The Defiant. “One, we know the borrower. But two, in case of default, we are very, very comfortable acquiring that asset.”
Several weeks ago, another Mega Mutant Ape sold for about 1,000 ETH in a private sale, Charania said. And last year, “these were selling [for] over 2,000 ETH, when ETH was almost two and a half times the price it is right now.”
Citing Wednesday’s sale of a CryptoPunk for 3,300 ETH, or almost $4.5M, ptm said Mega Mutants are likely undervalued, given their aesthetic appeal and their rarity.
“I think there’s sort of the two sides of NFTs – it’s ‘these things are worth a lot,’ but there’s also ‘what are they for?’” he said. “And I think we’re really trying to figure out ‘what are they for?’ and how they change existing businesses that we know and love, like media.”