Host: Blair Zhu, Mint Ventures
Special Guest: Dylan, Co-founder & COO of Spice Finance
Youtube: WEB3 Founders Real Talk with Spice Finance
Podcast: WEB3 Founders Real Talk with Spice Finance
Blair: Hello everyone! Welcome back to Web3 Founders Real Talk. Today we’re here with the Co-founder and COO of Spice Finance to talk about his expertise and insights on Web3 entrepreneurship. Welcome, Dylan.
Dylan: Hi, thanks for having me. Yeah… excited to be here and looking forward to this talk, and it’s nice to meet you, Blair.
Blair: Thank you for joining us today. So, can you just briefly introduce yourself and your project?
Contents
Founding Story of Spice Finance
Dylan: Yeah…for sure! I think I can go into my background first, and then I’ll give a brief overview of Spice. So yeah, I’m…I’m Dylan, one of the three co-founders of Spice. My background was actually pretty non-traditional, so I come from hard science…so I studied Chemical Engineering at Cornell University with a focus on Electrochemistry and Battery research. So that was actually the focus of my…the majority of my professional life was there. I was doing a lot of academic research, did some research at school there, and also did some research at Harvard. And then I was also slated to go to UC Berkeley to get my Ph.D. in Chemical Engineering, with some government scholarships.
But, throughout that time, I actually always had a focus or a fascination with crypto on the side. It was just something that I’ve developed through my personal readings, as well as listening to podcasts in space. And then also, playing around in the space when I had free time. And it was the sort of thing where I had a hobby that kind of grew into something that I spent more and more time doing. So I ended up actually taking a couple of gap years between the time that I graduated and the time that I was supposed to go to do my Ph.D. And during that time, I really kind of dove deep, to the point where it was something that I really wanted to do at a full-time capacity, I was going to get my Ph.D. was starting to become less and less appealing to me, and the more and more I dove into crypto.
It was also around that time that I kind of connected with the Co-founders that I have right now we’re actually old friends from high school. So I guess it was more so of a reconnection. They also kind of helped me get started and guided me into space.
So I’d also kind of come into crypto during that gap year with a background in entrepreneurship as well. I’d actually worked for a battery company right out of college. So that was where I started to get exposed to earlier finance, as well as early-stage operations as well. And that was really interesting to me, too. So combining that with an entrepreneurship background working in early-stage products from an academic side. And then also my side, I guess, hustle and interest in crypto kind of led me to, entrepreneurship or founding in the crypto space. So that’s kind of how I got here on my personal journey. We can kind of talk about how we arrived at Spice, but I could give a high overview of what the protocol is first.
So Spice is the problem that we’re fundamentally trying to solve at Spice is lending against NFTs. So viewers who are not familiar with NFT-backed lending, it’s essentially a mechanism or a defined mechanism, you could say, in crypto where you, as an NFT-holder can put up your NFT as collateral and take out money against that NFT kind of similar to how you would if you were taking money out against your home a mortgage or something that. And then you can put up your property as collateral, you can take out money against it. And then you can use that money to do whatever you want, whether or not purchasing more NFTs or executing a trade or something of that nature.
So as you can imagine, there are two sides to that market. The first is the borrower side. So the people who hold the NFTs and then the lender side, the people who are funding the loans, supply money to the borrowers. So when we started playing around in space, we saw that there was a deep problem on the lender side where if they were looking to successfully fund these loans and successfully farm a bunch of deals in space, it was an incredibly complex problem for them to do so.
And we found out that, the source of that complexity really comes from two areas. The first is the space in and of itself is extremely fragmented. So there are 30 different NFT lending marketplaces on each main layer right now that are either going live or going to launch In the next couple of months, as each of these NFT lending marketplaces has different mechanisms involved in the lending process, so some are P2P, some P2Pool, and then you’re starting to see hybrid solutions kind of coming up as well. And that’s all to say that, if you’re an individual lender, and you want to earn yields across all of these platforms, you have to absorb not only a vast amount of information but also a diverse set of information.
And then I think the second thing that makes it hard to lend against NFTs is that, as we all know, NFTs are much more liquid than your fungible cryptocurrencies, for example. And the lack of liquidity in NFTs makes the price action very volatile, because you can, if you play around in NFTs you definitely know, or it’s notoriously volatile in price. So that also makes there’s additional risks that are added to analyzing the expected value of the loan. So if you’re really looking to analyze the loan and make sure that you’re safeguarding yourself from taking on bad debt, it’s actually a fairly sophisticated process. And it also takes a lot of your time. So those are the two problems that we’re really trying to solve.
The way that Spice seeks to solve this is we want to build infrastructure such that, power-users of Spice can spin up vaults. And these vaults essentially aggregate all the loans in the industry. So across all of the different marketplaces, that allows the power-user, the vaults allow the power-user to set, predetermined or it allows the power-users to set up initial parameters for the lending strategy that the vaults deploy. So you can imagine which NFT lending marketplaces you want exposure to and which NFT collections you want exposure to. And then let’s say, the value at risks that you want to incur as a proxy for the local yields that you’re looking to see. And then from there, the vaults take those initial parameters, spit out a specific lending strategy, or you can think of a portfolio of loans that the user wants to deploy to. And then any vaults, in DeFi, deploy the capital that the user kind of inputs into the vaults.
And then on the other side, if you’re just a yield farmer looking to earn yield in space, but you don’t want to do all the heavy lifting of becoming a “strategist”, you can come onto the platform, see which vaults have been split up previously by other users, and then just contribute capital to where you want exposure. So that’s kind of the solution. And then the idea here is that Spice Finance wants to just be a conduit for liquidity. So the idea is, we reduce the energy barrier on the lender side and input liquidity into the space, which would make the borrowing process for holders much more smooth. And then for the marketplace, we just want to be another source of liquidity for them to settle loans. So I know that’s pretty long-winded. But I think that goes through my background, as well as a high-level overview of what Spice is about.
Blair: Wow, that’s super cool. Especially I love that story that you’re really fixated on crypto, and somehow, you just let it in there. That’s definitely very impressive because I was actually going to ask why did you guys establish this project in the first place? But it seems you probably answered my questions, partially, because you identify the pain points, and somehow you came up with a solution that may solve the problems. So I’m wondering is there the heaviest lifting or any challenge or resistance you encounter on your journey, when you start building up?
Challenges & Resistance that Spice Encountered
Dylan: Yeah, I can kind of talk about this on a personal level. And then maybe I can give some insights into Spice and the journey that we’ve been on there.
So for me as a Web3 entrepreneur, and especially in the CEO stage of, an early-stage company, and especially in crypto, there’s a lot of context switching that you have to do. We’re a pretty small team, we actually only have four full-time employees, including the three founders on the team. So the role of the CEO, especially at the early stage, is to plug inefficiencies within the team. So that requires me to kind of have a lot of “first time” in terms of attempts to do things.
So when we first started on Spice, I was leading the charge on the growth, marketing, and community building of the team. But as you could probably tell, my background is nowhere near what is required to be a good marketer, I guess I came from an engineering background and am way more technical than being, I guess more so of a social, social type of role. But I think I did pretty well, I think something that I do well is, picking up new skills and learning, learning them quickly, and becoming experts. So we were able to rally, I was able to develop some kind of techniques to build the community, from zero to 25k followers in three months and build Discord from 0 to 4k in three months. So that was pretty good.
But since then I’ve actively switched my role on the team. So now kind of off the marketing in terms of being the main person that’s leading our community, we actually have one of our close friends Shredy, who’s leading that effort now. And now I’m learning UX design from the bottom up. So that’s something that’s been, relatively challenging, but something that I think I thrive in, in terms of picking up expertise is from the bottom up, I think the thing that’s difficult for me is that I’m, slowly, getting better at over time is, switching quickly. So switching concepts from growth to UX design, for example, in a timely manner. So that’s something that, I guess, is pretty unique in terms of the challenges that I’ve dealt with in growing with Spice.
And I think for the protocol level something that’s been uniquely challenging for us is that we’re an aggregator. So it’s both a blessing and a kind of a curse that we started in NFT Finance at the time that we did because, on one hand, the market is very nascent and it’s very fragmented. So the opportunity is pretty ripe. And the value proposition for aggregation is pretty ripe. But the total size of the market is actually not as… it’s not that big. So, in the sense, a lot of the loans that are being settled, a lot of the volume that’s been settled is being settled on the platform. As for us, we are playing in a space where it’s the current TAM(Total Addressable Market) is relatively small. So it is relatively difficult for us to penetrate the current volume of the market. Given that, there are already players that have been existing for the past, year and a half before us. And so a unique challenge for us is how do we gain liquidity from the outside and pump it in. Because the value proposition is very clear, the yields in the space are relatively high as compared to those elsewhere on the main net. So the challenge is how do we seek that yield? How do we get that? How do we get visibility to gain liquidity and gain TVL on our platform?
Blair: Wow, I will say how to get things right has been really challenging for most entrepreneurs, and especially for your personal experience, I can totally get it, I can definitely relate to that because it’s been a steep learning curve for everyone. And somehow, in an early-stage startup, you have to be able to wear different hats. And you’re probably going to do, as you said, you have a technical background, have an engineering background, but you don’t really have any marketing skills, but somehow you just have to learn it, because you’re building everything from scratch. So that’s really cool. And my next question would be: since you have been starting your project for a little while, what would you be your recipe to share with other entrepreneurs, how to make the project more sustainable, and how to make your project hold up in the first place? And how to engage with the community?
Recipe for Project Sustainability
Dylan: Yeah, I think the first thing that comes with that is on the founder level, you want to make sure that you’re founder fit kind of framework, you want to make sure that the founder market fit is very strong. Because, a lot of the motivation that you gain to continue fighting against the volatility, you’re fighting against the different problems that come up in your entrepreneurship journey. It’s a lot easier to deal with that when this is the space that you want to operate, entrepreneurship is the thing that you want to do. And you would not want to be doing anything else. So for us on the team, we all live in crypto, and we believe in the ethos of the space. We’re philosophically aligned with what the space is trying to bring into the world. And, despite all of our different backgrounds, despite my background in chemical engineering, for example, we’ve all kind of dropped what we were working on in order to dive into this space. I don’t think there’s anywhere else we would rather be building and then there’s nothing else we would rather be doing than building. So in that sense, I think it’s very easy to continue to gain motivation to solve whatever challenges kind of come our way.
And then I think from the perspective of Spice and our company, something that we’re very focused on in terms of the development of our core infrastructure, and the core lending strategy is a focus on risk. So sustainability is our primary objective at the end of the day, our value proposition is yield, but really, it’s risk-adjusted yield, because we want to make sure that our depositors in these vaults are protected as much as possible. And we want to make sure that we’re mitigating any “black swan” events that may come up in the NFT space. So from a focus on risk, we secondarily focus on yield.
I was mentioning this kind of approach is how you ensure that you have long terms of survivability because it’s always nice to be able to advertise, a good API, , 1,000,000% API, but it’s not something that can realistically be the mainstay going into the future. And then it’s also very fragile because if you have one blow-up, then your company is pretty much screwed, you never gain trust in this space again, and you’ll never be able to restart. So you want to avoid those types of events as much as possible. So we make sure that when we’re analyzing these loans when we’re developing these portfolios, for the vaults, they are as risk mitigated as possible.
Blair: It seems you guys are really dedicated to this niche, to make sure just focus on one thing and just keep doing the things until it has been fully delivered to your audience.
Well, the next question will be a little bit tricky, because that’s probably my go-to question to every entrepreneur because we’ve seen what has been happening in this industry from Luna Crash, FTX Collapse, and also USDC de-peg, there are always some uncertainties, I will say. So as entrepreneurs, we have to make sure that our project will be fine in any kind of dynamic environment. So how to seek breakthroughs? Or what would be your strategic movement when facing such a dynamic environment?
Seek Breakthrough in Dynamic Environment
Dylan: I think this is kind of flipped on its head. I think that it’s exactly the volatility of the market environment, the nascency of the industry, and the dynamics of the environments that really makes them very prone to breakthroughs.
So if there’s any industry, I think that exists out there. If you compare crypto to Web2, to SaaS companies, and traditional SaaS companies to Tra-Fi, crypto is the space where breakthroughs are most prone to happen, specifically because of the volatility. Alpha is generated more so and went through that anywhere else because there’s so much going on in terms of, the price actions of these cryptocurrencies, as well as NFTs. There are new innovations always happening. There are new problems that are always popping up. And then not only that, but give them the newest industry that exists in the space. So there are frameworks set from Web2 that you can apply to Web3, from Tra-Fi that you could apply to Web3. So there’s always a breakthrough around the corner. So it’s just a function of being able to find it.
It’s not to say that it’s easy to find breakthroughs in crypto, but I think that they’re more widely available in crypto than any other industry because there are less players, there are less infrastructure, there are less competition in Web3. Objectively, I think when you compare it to Web2 or Tra-Fi… the way that you framed your question in terms of these different disasters that kind of happen in crypto, it’s kind of I don’t want to say ruthless, but I think this is a kind of a reality check, the short term volatility in crypto, I think breeds long term stability.
So the blow-ups in FTX, and the blow-ups in Luna, etc, that have happened over the years kind of set up the new paradigm for the next Bull run, the next Bull Run learns from the lessons of the previous Bull Run or the previous Bull Run and subsequent crash, and the technology becomes more robust, players become better, that’s all to say that they’ll be perfect. But I think that lessons are learned along the way. A lot of life is very cyclical in that respect.
So I think that in terms of the innovation cycle, I think it’s inevitable that these things will tend to happen. And after crises are born new paradigms, new opportunities, and new breakthroughs can kind of happen. So in some sense, it hurts in the short term, everybody’s here. The market’s kind of suck right now. But that’s really the time when new innovation is a kind of breed. The companies that are building now are much more robust than they are building into the bull market and are much more likely to actually provide real value because the ones that don’t just inevitably fail in these turbulent market conditions at times. But to answer your question, how do you position yourself for breakthroughs? I think it’s to become one of the players that you’re looking to target.
I think, first you really want to immerse yourself in whatever vertical or industry that you’re interested in serving. So you just want to become a player amongst others. So we operate in an industry of two different sides, lenders and borrowers. And we wanted to serve lenders. And before we started building Spice, we became lenders ourselves. So we started lending against loans and started understanding, the process, the pain points in space, what works, and what doesn’t work.
And then also making connections. So we started getting connected to other lenders, talking to them, and getting a sense of their problems as well. And then the key is you need to focus on these problems. Ignoring the desire to find a breakpoint at the end of the day, or, a breakthrough at the end of the day, you really just need to solve a problem that exists in the space, or else, you don’t really have a value proposition, no matter how good your product is. So you talk to the players about those problems. And then oftentimes, breakthroughs are emerging. So oftentimes, the problems from the players that you’re talking to, when you talk to them the solution to those problems kind of emerges. And that’s really how kind of Spice was formed. We never really pushed a product down any lenders’ throats, it’s more talking to them about their problems, and then asking them, Okay, you have this deep pain point, how would you try to solve this, and then oftentimes, you kind of see a single solution arise from all the interviews, and then also your own experiences, and then it remains to be seen whether or not that’s a breakthrough. But I think that at the end of the day, that’s how “breakthroughs” start, just an individual problem. And a solution emerged from the players.
Blair: I’m totally siding with you on this. Because I was thinking, probably…fingers crossed, hope is not happening, but we’re probably gonna see more bleeding and more pains in the near future, but it’s actually helped us to reshape the whole industry and somehow mature the industry. People probably would have more proper risk management skills, and probably would have more proper work ethic. And that will definitely help us to keep this industry longer and longer and also keep it up the more advanced.
Yeah, also you talk about Spice Finance as is determined to really simplify the NFT lending process by aggregating all loans and pools. And we already know that Spice Finance also launched an NFT appraisal tool. And I think that’s the most substantial pain point in the NFT industry. So what is your unique differentiator compared to other NFT appraisal tools? And how does Spice Finance plan to be recognized by the community to adopt your appraisal tools in this case?
Major Difference in NFT Appraisal Tools
Dylan: Yeah, so I think this is could be a point of misconception. And the NFT appraisal is a core part of our tech stack. Because you could think of the NFT pricing data kind of feeding into our risk analysis system. So I guess NFT pricing data gets transformed into NFT price volatility data, which gets fed into our risk management system. And then our risk management system kind of creates a portfolio of loans that the vault lends to.
But the NFT appraisal system that we’ve developed it’s not something that we built in-house, but more so we rely on other industry players. So in the same way that we’re aggregating loans, we’re also actually aggregating other NFT appraisal systems. So we just take the NFT pricing data from Upshot, NFTBank, SPICYEST, and Nabu. The way that we do it is essential, whenever we need to rebalance the portfolio of loans that we have, we just analyze all of the NFTs that we’re interested in and look at all of these different AI models that these NFT appraisal tools use. And then we essentially just take the lowest model with the lowest error rate, and then we use that to appraise whatever NFT that we want to look at. So it’s not a crazy innovation, in the sense, I guess, any player can really do what we’re doing.
But what it does is it allows us to guarantee that we have the best appraisal in the system, the most accurate appraisal that’s available in the industry, because we essentially just take all the players and then take the best one at any given moment in time. And that’s really what’s important to us. We just want accurate pricing data to have the best portfolio constructor that we can. So that’s how we do NFT appraisal.
But in terms of visibility, I think that visibility kind of comes into three main areas. The first is that we’re glad to have our Head of Growth Shredy on board to help with this. But there’s three main areas that we really do to increase visibility. The first is we deploy a strategy where we partner with a bunch of NFT Finance protocols, so as an aggregator, we kind of touch all corners of the industry. So we co-marketing announcements with NFT Finance protocols, this happens a lot in DeFi, we think that it happens less so in NFT Finance, and it’s something that the industry could benefit from overall. So it’s kind of two plus two equals five, the partnership together is more so than each of us can do individually. And then we also want to kind of replicate that into DeFi. Most of our team comes from a DeFi background, we have some OHMs on our team, as well as some guys that previously at Jones, Jones Dows. So our connections into DeFi are pretty deep. So we want to kind of extend that partnership into the DeFi protocols as well. And this is also advantageous for us because, honestly, our protocols are more so DeFi protocol than it is NFT protocol. So we offer yield, which is what a lot of DeFi people are seeking at the end of the day. So that’s another strategy we deploy to increase visibility. And the third is we are about to start focusing on networking and building relationships with institutional liquidity providers and market-makers as well. Because I think this is something that will be especially good to bring liquidity into Spice and grow it overall.
Blair: Yeah, sounds like you guys have a really sophisticated Go-to-market strategy on how to engage with more communities, and how to earn more adoptions by those synergies between all the protocols by earning endorsements from other brands as well.
Well, as you mentioned you guys have the DeFi background, and we all are aware of how crazy it was in DeFi summer. Do you think we’re going to have our own NFT summer and do you think that this sector will be the main driver for the next Bull Run? Or are there any other insights you want to share?
Main Drivers for the Advent of NFT Summer
Dylan: Yeah, for sure. I mean, I think the advent of an NFT Finance summer is inevitable. It’s just a matter of time before the industry and the market is ready to blow up.
This is a narrative amongst a couple of others that it feels there’s no future where it doesn’t blow up. NFT right now is really used for arts and collectibles. But the NFT technology isn’t just representing arts and collectibles on-chain, it’s really representing any unique asset. It’s a non-fungible token, which means that it can’t be swapped for any other asset. And if you think about traditional finance, all traditional finance is built on non-fungible assets. Everything you use, everything you assign value to is really non-fungible.
If you compare the total value of assets in the world versus the M2 money supply as a proxy for the total market cap of the potential total market cap of NFT versus the total market cap of cryptocurrencies Bitcoin and ETH, the total market cap of all assets is vastly greater than the market cap of the M2 money supply in the world. So there’s a long way to go in terms of NFT adoption, and NFT expansion. And NFT Finance, on top of that, is really just finances as we know it. So it will have to develop in order to unlock all of this liquidity and make efficient digital markets. So I think that it’s inevitable that it’s going to happen.
I think the drivers that make that future happen are really threefold, and the two are kind of aligned with each other. But I think the first is, we need DeFi liquidity to move into NFTs is a first step. And I think that this is already starting to happen. I think that tools like Blur are starting to attract traditional crypto market-maker liquidity as well as trader liquidity into NFTs, , Blur causing a lot of controversy in the current state. But I think that it is really kind of an inevitable move of NFTS from just collectible items into something that’s more liquid, I think this is a catalyst for the movement of NFTs becoming something more than just a collectible item, something that people trade, something that becomes very liquid, things of that nature, which I think is beneficial for the asset class as a whole. And this is a kind of Blur strategy as well.
And then also our strategy is aggregation. Because right now, NFTs are extremely illiquid, it’s very complex. And this liquidity makes it very complex in order to market make trade, lend, and borrow against NFT. So I think that aggregators simplify space and will be very key in terms of pumping liquidity, making space grow overall, kind of lubricating the gears in space in order to set ourselves up for an NFT Finance summer. So this helps with things like price discovery that helps with volume, etc.
And I think the third step to all of this is the expansion of NFTs into other use cases. The public perception of NFTs has to move away from just PFPs, collectibles, and one art to anything else. So three areas that we’re looking at that are of interest to us are Game-Fi assets. So game assets kind of fall into a category, or a framework in our heads of digitally emergent assets. So PFPs are kind of digitally emergent assets, but Game-Fi, we think is another area of vertical that can generate a bunch of digitally emergent assets. And then also, for example, there’s a vertical called Financial NFTs. We actually launched our own Financial NFTs. So these are just NFTs that represent any kind of financial position. In DiFi you can think of a receipt token for a vault, our prologue NFTs or the Uniswap V3 LP position NFTs. So, we think that these will be extremely powerful. You can start thinking of stock contracts on-chain and things of that nature, just as an example.
And then the third area is real-world assets on-chain. This is the connection of real-world liquidity into crypto liquidity using NFTs as the medium which I think is going to be another area that kind of blows up into the future, so I think that the combination of all these three things, I guess in my opinion, really comes down to liquidity and just how you tap into the different sources of liquidity.
The first is just tapping into DeFi liquidity, which is crypto liquidity right now. The second is tapping into other crypto use-case liquidity, so that’s Game-Fi and then the third is tapping into real-world liquidity, which is real-world assets on-chain. I think if these conduits are opened up, I think we will inevitably see an NFT Finance summer. It’s just a matter of when that happens.
Blair: Wow, that’s a lot of information to process. Thank you for being super insightful it was really illuminating. We can tell you guys have prepared a really comprehensive strategy for this Web3 entrepreneurship journey, and also you guys have an amazing knowledge of this, such as how to analyze the trends. It’s really good to know we’re gonna have an NFT summer. Long story short, it’s gonna be a fun ride. Personally, even for Mint Ventures, we are being really bullish on NFT and DeFi sectors, so looking forward to seeing more innovations in your projects.
Thank you so much for your time, Dylan! And it has been a really fun talk with you.
