The possibility of a massive liquidation “death spiral” is threatening the Non-Fungible Token (NFT) market after popular digital art collection Bored Apes Yacht Club (BAYC) experienced a sharp price drop of over 50% from the asset’s all-time high.
Fears of a cascading liquidation event started to spread after NFT Collector and Web3 build studio Wumbo Labs owner “Cirrus,” made some pronouncements on Twitter on August 18, stating that “32,267 $ETH ($51,206,760.99) worth of NFTs” are serving as “collateral for loans on BendDAO.”
Matters got further exacerbated shortly after news about a certain “Franklin” borrowing 10,245.37 $ETH ($16,109,922.24) from BendDAO, spread through the community. According to sources, Franklin is one of the biggest collectors in the space, with 60 BAYC NFTs in his portfolio.
People worry that since some of these whales are holding too many apes, they can easily weaken the floor price to repay their $ETH debt. This could eventually cause a much-feared liquidation that will see deposited NFTs get sold off at a much cheaper floor price.
What is Bend DAO?
BendDAO prides itself as the first peer-to-peer NFT liquidity protocol. Also dubbed by its creators as an “NFTFi” project, BendDAO only deals with high-value, blue-chip NFTs such as Bored Ape Yacht Club, Cool Cats, CryptoPunks, and Azuki.
The lending protocol allows $ETH depositors to provide liquidity and earn a yield of 8.15% Annual Percentage Rate (APR) in $ETH, as well as the token $BEND. NFT holders can also borrow $ETH should they choose to lock up their assets.
By locking up NFTs in BendDAO, the owners are allowed to borrow up to 40% of the collection’s floor price. As the floor prices draw closer to the loan’s original value, the borrower is given 48 hours to repay the loan, or the assets will get liquidated and put up for auction.
BAYC NFTs that were used as collateral on NFT lending platform BendDAO are approaching the lowest “Health Factor” levels. Health Factor (HF) represents the safety of deposited NFTs against borrowed Ether ($ETH), with level 1 triggering the liquidation.
The higher the value of the HF, the more secure the funds will be during a crash.
Run on the Bank
As of August 22, BendDAO has run out of $ETH and people who lent their money to buy NFTs on leverage, can’t take their cash off the protocol. Around 15,000 $ETH have been lent and there is only 12.5 wrapped ETH ($wETH) left in the contract (per NFTStatistics.eth).
This would also mean that borrowers need to pay 100% interest on their borrowed $ETH, as the debt against the NFTs is rising fast. Meanwhile, the NFTs are being listed in BendDAO auctions, but are not hitting exchanges, due to the fact there is no one bidding on them.
About Bored Apes Yacht Club
Bored Apes Yacht Club is a collection of 10,000 “Bored Apes” existing on the Ethereum blockchain. As of this writing, BAYC has the highest floor price of any NFT project in the market at 69.7 $ETH, with a total volume of 653.1K $ETH (per OpenSea).
The most expensive Bored Ape ever sold was Bored Ape Yacht Club #8817, which set a record $3,408,000. The current most expensive NFT listed on the market today is a blindfolded ape wearing caveman pelt, priced at a sky-high 99,999,999,999,999 ($159,689,999,999,998,400).
Due to the high demand for BAYC NFTs, this impending liquidation is viewed by some in the space as an opportunity to buy at a discount. However, the process will be accompanied by a lot of pain, particularly for holders who bought at an all-time high.