As an active participant in DeFi markets, I’ve been closely following Canto since its launch last summer. The concept of enshrining core DeFi primitives (which have historically been monopolistic and rent-extracting) as Free Public Infrastructure (FPI) was and still is revolutionary. But Canto’s long term vision is far more ambitious: the protocolization of TradFi institutions. If executed well, this could take Canto from a novel incentives experiment to a decentralized hub for trillions of dollars in TVL (yes, you read that right). It all starts with tokenizing Real World Assets (RWAs).

A Primer on RWAs

RWAs have existed since the birth of crypto’s execution layer (Ethereum), but the only class of RWAs to have achieved product-market fit are stablecoins. Stablecoins, namely USDT and USDC, constitute over 11% of the total crypto market cap ($125B) and are the primary form of on-chain value storage and transfer.

Attempts to tokenize other RWAs such as equities and commodities haven’t gained traction because TradFi markets for these asset classes are extremely liquid and accessible. There exist NBBOs (National Best Bid and Offer) and unified electronic trading marketplaces with great UI/UX. Protocolization of these markets can provide an easier settlement process and more transparent custodying, but it’s not a 10x improvement over TradFi.

Thus far, the majority of crypto market participants fall into one of two buckets:

1. Investors seeking sources of consistent yield with low risk on principal

2. Speculators seeking large multiples on high-risk bets

We can see this in the types of DeFi products that have found product-market fit: stablecoins, lending markets, spot exchanges, and perpetual futures exchanges. The vast majority of these rely on stablecoins for trading and settlement.

Existing Stablecoins Are Flawed

While Tether (USDT issuer) and Circle (USDC issuer) have captured the majority of TVL and volume, they suffer from the following issues:

• Lack of transparency regarding the mix of assets serving as collateral

• Regulatory risks and scrutiny around a single centralized custodian

Both of these stablecoins have faced de-pegs on multiple occasions (e.g., Silicon Valley Bank collapse). Furthermore, there is limited legal recourse for users if an offshore custodian acts in bad faith or gets compromised. The common argument that both Tether and Circle are “Lindy” is irrelevant.

What the ecosystem needs is a stablecoin that is compliant with US regulations and backed transparently by the safest collateral on the planet.

NOTE Fixes This

To address the risks that single-custodian stablecoin issuers pose, Canto is modifying NOTE, its existing over-collateralized stablecoin, to be backed by on-chain T-Bills issued by KYC-compliant custodians such as Hashnote (backed by Cumberland) and FortunaFi. By partnering with multiple legitimate RWA issuers, Canto facilitates a perfectly competitive market on custody cost while minimizing regulatory crackdown risk. How?

Simply put, the issuer with the lowest fees and highest compliance level will win the majority of the TVL. With this, Canto tackles the biggest pain points for stablecoin holders today by creating a safe, compliant, and efficient store of value. But there’s more at play here.

Democratizing Access to Yield

Canto’s RWA framework will enable KYC traders to borrow capital from non-KYC traders to purchase treasuries with higher yields than their borrow rate. This is accomplished through a leveraged carry trade on US treasury yield minus NOTE yield. Here’s how it works:

1. KYC-compliant users (labeled as “carry traders”) mint T-Bill(s) on-chain through one of multiple governance-approved issuers (Hashnote, FortunaFi, etc.)

2. The carry traders post the on-chain T-Bill as collateral on the Canto Lending Market (CLM) to borrow cNOTE (collateralized NOTE)

3. The carry traders can then sell the cNOTE for USDT/USDC through the Canto DEX and lever up on the carry trade if they desire (by minting more on-chain T-Bills to borrow against using the funds they borrowed initially)

4. As liquidity flows into the ecosystem due to the attractive carry trade, the NOTE interest rate in the CLM will rise to the short-term T-Bill interest rate minus the cost of custody and compliance

5. Non-KYC traders (labeled “on-chain yield seekers”) can access this yield by buying NOTE using USDT/USDC and supplying it to the CLM

An easy way to think about this is that the KYC carry trader is essentially a market maker between the RWA issuer and the non-KYC yield seekers. Their edge comes from being onshore and KYC-compliant which allows them access better interest rates than non-KYC crypto traders.

Sample Carry Trade

Here’s an example of the leveraged carry trade Canto enables: an APR reminiscent of Anchor Protocol (remember that?) with minimal risk because the yield is backed by actual US treasuries and not Do Kwon. Liquidation only occurs if the NOTE interest rate exceeds the T-Bill interest rate (which is technically possible but highly unlikely as an arbitrage would exist).

More Than Just T-Bills

The potential of RWAs extends far beyond US treasuries - the US fixed income market size is $42T, with high yield debt comprising around $2T. Corporate and municipal bonds, SMB financing, auto loans, and trade receivables are all in play. With DeFi rails, the rehypothecation possibilities are endless, and Canto is uniquely positioned to capture the opportunity. I, for one, am incredibly excited for what’s to come.

The Cannibalization Problem

Many Web3 brands build on the success of their flagship NFT collection by launching follow-up projects. It’s a proven way to monetize an existing fanbase and grow an ecosystem. Follow-ups (also known as derivatives) usually take one of two forms:

• Variation of the flagship. For example, Yuga Labs built Mutant Ape Yacht Club (MAYC) as a creative extension of Bored Ape Yacht Club (BAYC).

• Accessory to the flagship. For example, Remilia Corporation designed Banners to accompany Milady Maker as the header to Milady’s profile picture.

In both cases, the flagship and the follow-up compete for liquidity, putting an effective ceiling on both floor price and market cap.

Why?

My view is that institutional buyers (read: whales) treat distinct NFT collections from the same creator as fungible assets and diversify by owning NFTs from different ecosystems. I’ll motivate the thesis with an example.

NFT Whales Just Don’t Care

Suppose you are a fund manager whose LPs want exposure to digital assets. You have a broad thesis that popular NFTs will outperform ETH in risk-on markets but also recognize that you have no edge in appraising individual art pieces or ecosystems.

As a result, you decide to diversify. Naively, let’s say you have two options:

• Buy an evenly-split basket of each of the top trending NFT collections

• Buy an evenly-split basket of NFTs from each of the top trending creators

These sound similar but actually result in wildly different portfolios. The reason? Leading NFT creators often have multiple projects on the “trending” leaderboard. If you bought a basket of of the top trending NFT collections, you’d be overexposed to Yuga Labs; BAYC and MAYC are consistently among the top trending NFTs. This isn’t necessarily a bad thing, but it is something you need to be aware of and have an opinion on.

Upon investigating, you confirm there is practically no difference between buying a BAYC and a MAYC from a risk-reward standpoint. Empirically, the beta between the two is close to 1. Intuitively, the beta between a BAYC and a MAYC will always be higher than the beta between a BAYC and a non-Yuga Labs NFT because BAYC and MAYC give exposure to the same thing: the Yuga Labs ecosystem and associated narratives.

If you thought you could diversify by buying different NFTs within the same ecosystem, you’re out of luck.

As a result, you buy a basket of “blue chip” NFTs with equal allocation to each top creator. This varies, but an example allocation might be 25% Yuga Labs, 25% Remilia Corporation, 25% Chiru Labs, and 25% DeLabs. And if your thesis remains the same, you’ll periodically rebalance your portfolio (let’s say once per quarter) to maintain diversification.

While I made some simplifying assumptions, this is a roughly accurate framing of how crypto/Web3 funds approach NFT trading. When big buyers cap their exposure to individual artists instead of individual collections, there is a ceiling on the amount of money flowing into any given NFT ecosystem.

Who’s Buying Follow-Ups?

Now we know institutions are less likely to buy into a new collection by an established artist because they already have exposure to the flagship collection. So who’s buying?

There are only two natural buyers of follow-up/derivative collections:

• Superfans. These buyers are usually price-agnostic and fiercely loyal to a specific creator/ecosystem and want a piece of any new collection they release.

• Speculators. These buyers are profit-seeking and only buy into a follow-up collection if they see it as undervalued relative to the flagship. If they’re bullish on the creator but have no opinion on the relative value between the flagship and the follow-up, they’ll just buy the flagship as it’ll be far more liquid and less volatile.

I suspect that the true number of superfans is lower than most think and that most "superfans” are actually just naive speculators doing -EV trades. There’s a reason the sentiment of “the more expensive an NFT gets, the better it looks” is so common.

As such, the long run bidding of most follow-up collections should tend to zero, provided that true superfans are scarce and liquidity accrues to the flagship.

Most NFT creators are aware of this, seeing their projects dumped by so-called “superfans” when the number stops going up. Many have fully pivoted their business models away from selling follow-up NFTs to selling physical merchandise, licensing their IP, and even building metaverses (I remain skeptical). But without an organic fanbase, they are doomed to fail.

Remilia’s Winning Strategy

Remilia Corporation is perhaps the only leading NFT creator immune to cannibalization. They have genuine superfans who buy all their collections and are able to provide new value with each drop, allowing them to stick to their core competencies.

How did they pull this off?

As part of catering to their Terminally Online fanbase, Remilia embraced that the internet is full of subcultures; each of their pfpNFT collections caters to a specific online persona. I touched on this in my previous article:

“Remilia has an uncanny ability to spin up self-propagating online communities (read: viral cults), each with its own distinct aesthetic, leadership, and posting style.”

Whenever someone wears a Milady as their profile picture and adopts its unique posting style, they become part of the Egregore. And with each follow-up project Remilia drops, their fans are rewarded with a new digital identity to channel their creativity through. All they need to do is show up and start posting :)

Here’s a neat thread from @slumpt01 that explains the strategy:

Ultimately, the best hedge against cannibalization is having genuine fans who are rewarded for their loyalty. Who would’ve thought?

I follow on-chain markets closely, having traded everything from alt L1s to protocol tokens to memecoins. But until recently, I didn’t find NFTs particularly worthwhile. From a risk-reward perspective, they felt like an inferior alternative to memecoins: similarly reflexive and lacking any intrinsic value but way more annoying to trade and hedge.

Remilia Corporation

This changed when I came across Remilia Corporation. In their own words, Remilia is a community of “Avant Net Art Extremists”. In plain English, Remilia is the team behind some of the most successful NFT collections ever. They’ve been collected by the biggest names in crypto, survived multiple cancellation attempts (since refuted), and even received a shoutout from Elon Musk. At the time of this post’s publication, Remilia’s art has a total market cap over $100M with substantial liquidity and turnover.

Charlotte Fang, Remilia CEO

While its numbers are indeed impressive, what really sold me on Remilia was the blog of its CEO, Charlotte Fang. Once I got past his unique style (to say the least), it quickly became clear to me that, on top of being a talented designer and niche internet celebrity, Charlotte is a markets aficionado.

https://goldenlight.mirror.xyz/

From his notes on NFT royalties in the secondary market to his concise takedown of NounsDAO, Charlotte’s blog is chock-full of nontrivial insights on market dynamics and incentive alignment. I’m no expert on avant-garde art, but as a semi-retired derivatives trader (yes this is a Gainzy reference), I feel somewhat qualified to say that Charlotte’s economic commentary is spot on.

And it’s apparent that these insights bled into Remilia’s design process. Inspired by real-life collectible card markets, Remilia fully embraces the commercialization of their art; each of their collections have carefully planned scarcities, traits with uneven rarity distributions, and liquid secondary markets driven by their Terminally Online fanbase.

Cult-Posting as Performative Art

The last point is worth elaborating on. Remilia has an uncanny ability to spin up self-propagating online communities (read: viral cults), each with its own distinct aesthetic, leadership, and posting style. It’s impossible to assign a sticker price to, but their online presence is arguably the biggest driver of Remilia’s success to date and adds a another dimension to their already compelling art. This tweet sums it up well:

https://twitter.com/CharlotteFang77/status/1656254281534644224

There’s a philosophical component to this as well, but that’s a story for another post. The rabbit hole of Remilia lore runs deep!

Once I was convinced of Remilia’s cultural relevance, I began trading their debut collection, Milady Maker, and observing its online community, mostly through Twitter and Discord. So far, this has been fun, informative, and (to my surprise) profitable. But it wasn’t until I came cross Bonkler, Remilia’s most ambitious project to date, that I felt compelled to get back into writing.

Bonkler: Nouns, but better

Simply put, Bonkler is Remilia’s take on NounsDAO. With a reserve of 27,000 ETH (roughly $50M at the time of publication) and a median sale price of 72 ETH, Nouns is one of the biggest NFT projects ever. And like many early NFT projects, it suffers from flawed economics. I mentioned earlier that Charlotte published an analysis of Nouns’ systematic shortcomings. Bonkler is Remilia’s answer to those critiques.

@codeboymadif published a thread that distills the inspiration and improvements Remilia made; I highly recommend reading it over.

https://twitter.com/codeboymadif/status/1662971611522420737

Why I’m Paying Attention

1. There’s a ton of money flowing into the project. The settlement price for Bonkler #1 was 60 ETH (~$120k) in the middle of a crypto bear market. The median Bonkler goes for about 10 ETH. While these are already high, Nouns provides a reference point for Bonkler’s potential upside during a crypto bull run.

   1. Update: Last night, @eth_ben swept 10 Bonklers (25% of circulating supply for 225 ETH. Insane.

2. Remilia’s thought leadership has been prescient thus far. If a BonklerDAO forms down the line, I for one would be very interested in seeing how it handles governance and capital allocation; NounsDAO seems to be struggling with this.

3. A rarity meta is beginning to unfold, and it’s been pretty fun to follow along. There have already been large-scale bidding wars over rare traits, Bonkler #, and general aesthetics. Early market participants are making big bets at a high variance stage in Bonkler trading (rarities will become known as more Bonklers are revealed), and it’ll be interesting to see who the secondary market ends up rewarding.

4. There is additional game theory involved with Auctioncore NFTs, a Bonkler sub-collection that is yet to be released. All Bonkler bids, even those that lose the auction, are rewarded with Auctioncore NFTs. Rares go towards the highest bids. Even with only limited information, early bidders are working to farm Auctioncore.

Introducing the Bonkler Series

Over the coming months, I will be observing the daily Bonkler auctions, speaking with prominent collectors, and synthesizing my takeaways across a series of posts.

Areas of interest include:

• Bonkler bidder sentiment

• Notable auctions/events

• Rarity meta and how it’s expect to evolve

• Secondary market dynamics

• Bonkler sub-collection (Auctioncore NFTs)

• Potential BonklerDAO?

Will Bonkler be culturally relevant 1 year from now when the auctions wrap up? Maybe. Maybe not. But at this point, I know better than to fade Remilia :)

Thanks to Charlotte Fang and Remilia for sparking my interest in NFTs and inspiring me to get back into writing.