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Several BAYC and CryptoPunks collectors who put up their tokens as collateral backing for Ethereum loans have been unable to settle their dues. Crypto analysts believe this could mark the onset of the first major liquidation crisis in the NFT industry.
BendDAO Loans and Possible Risks
Rumors of a liquidation spiral began earlier this week following a post about NFT lending platform BendDAO. BendDAO is a web3 protocol that allows users to take out loans in Ethereum using their non-fungible tokens as collateral. The platform focuses mainly on rare, choice collections such as Bored Ape Yacht Club and CryptoPunks.
In a tweet on Wednesday, industry participant CirrusNFT began talking about “the single biggest risk to the NFT market.” According to Cirrus, BendDAO currently holds $59M worth of NFTs as collateral for loans. Reportedly, a significant portion of collateralized BAYC collectibles on the platform is close to liquidation.
There are currently 32,267 ETH ($59,048,610) worth of NFTs being used as collateral for loans on BendDAO alone
For the first time ever, a lot of these are at serious peril of liquidation
A thread on the single biggest risk to the NFT market that nobody is talking about
— Cirrus (@CirrusNFT) August 17, 2022
Cirrus took the time to explain how exactly BendDAO works. BendDAO gives out loans of up to 30-40% of the borrower’s floor value. According to the tweet, a loan on a Bored Ape with a 100 Eth floor price would typically incur a 15-25% interest rate.
Cirrus’ post noted that if the health factor of a user’s loan falls under one (h<1), BendDAO auctions off their NFT.
BendDAO’s auction lasts 48 hours and if the user fails to repay the debt in time, the highest bidder gets the token. For this to happen, the floor price for the NFT would have to fall 17% from its level at the time of the loan.
At present, there are at least 20 BAYCs alone with a health factor less than 1.1. And dozens more already under 1.2.
BAYC Headed For Large-Scale Liquidation?
Data in Cirrus’ tweets explained that BendDAO’s wallet currently contains 2.8% of the total supply of Bored Apes. 1.6% of the total supply of BAYC offshoot Mutant Ape Yacht Club is also in the platform’s possession. 45 of the BAYC NFTs with BendDAO are currently in danger of liquidation, said Cirrus’ post.
Reportedly, the values above do not factor in platforms like NFTfi which also have a large number of outstanding debts. Cirrus believes that with the ongoing situation, the NFT market is headed straight for a liquidation spiral.
To me, a liquidation spiral on these is a matter of when not if. NFT Volume is at yearly lows and there simply isn’t enough liquidity in the market to absorb all of these liquidations without a serious impact on floors.”
A Chance to Buy the Dip
Founder of Web3 marketing agency Double Studios, doubleQ, confirmed Cirrus’ thoughts. According to doubleQ, the coming liquidation event is unavoidable. The analysts noted that BendDAO’s exposure to other projects means the BAYC ecosystem as well as the broader NFT market will feel the impact.
Regardless, doubleQ expects the liquidation to provide collectors with a chance to cheaply acquire non-fungible tokens.
1/ How @BendDAO and BAYC loan liquidation can nuke the entire NFT market
30,300 ETH ($55m) worth of NFTs on the line
A must read thread to protect yourself 🧵
— doubleQ (@xDoubleQ) August 19, 2022
Interestingly, not long after news of the potential liquidation emerged, it also surfaced that notable BAYC member “Franklin” had debts with BendDAO. The collector is one of the biggest NFT whales worldwide with a collection of more than 60 BAYC NFTs. Franklin reportedly took out a 10,245.37 ETH loan from the platform, roughly $19.2M currently.
Franklin revealed on Thursday that they had paid off the BendDAO loan. However, this had had little effect on the widespread anxiety the liquidation speculations have triggered across the crypto community.