Many owners of prized Bored Ape Yacht Club (BAYC) NFTs and CryptoPunks, who used them as collateral to borrow Ether (ETH), have been unable to repay their debts. The situation could lead to the first mass liquidation event in the NFT sector.
gm.
As a result of the floor dropping to 72, the first BAYC liquidation auction on BendDAO has begun
Starting price of 68.4e…
Any takers or is this going to be the first bad-debt domino that falls for the platform? pic.twitter.com/7qxsIi661e
— Cirrus (@CirrusNFT) August 18, 2022
gm.
As a consequence of the drop to the floor at 72, the first liquidation auction of BAYC in BendDAO has begun
Starting price of 68.4e…
Any interested or is this going to be the first bad debt domino token to drop for the platform?
Is BAYC’s “Death Spiral” Coming?
DoubleQ, founder of web3 platform Double Studio, claims that lending service BendDAO could liquidate up to $55 million NFT to recover its loans, fearing the so-called “health factor” of these debts would drop below 1.
In particular, the minimum price of an NFT collection is important in determining the health factor. BendDAO offers between 30% and 40% of the minimum price of an NFT as a loan. But the protocol sells the NFT if its price floor gets too close to the amount lent, a liquidation threshold, as explained below.
Meanwhile, the BAYC price floor has fallen from 153.7 ETH in May to 69.69 ETH in August, a nearly 55% drop in three months. At the same time, the health factor of at least 20 loans with BAYC as collateral has fallen to 1.1 as of August 19, according to BendDAO data.
4/ Why is this a problem?
There are currently 20 BAYCs with under 1.1 health factor
And wayyyy more under 1.2
Meaning, all of those apes WILL get liquidated, soon. pic.twitter.com/5jwoZZXHRT
— doubleQ (@xDoubleQ) August 19, 2022
4/ Why is it a problem?
There are currently 20 BAYC with a health factor less than 1.1
And many more below 1.2
Which means all those apes will be wiped out, soon.
Borrowers have 48 hours to repay the loan or their NFT collateral will be liquidated. According to doubleQ, these liquidations could lead to “a death spiral for the BAYC ecosystem and the NFT market as a whole,” given BendDAO’s exposure to other NFT projects, including CryptoPunks and Doodles.
“OpenSea volume is at the lowest point in the last 12 months,” the analyst warned, adding:
“There just isn’t enough volume to salvage these liquidations… It’s inevitable.”
OpenSea is the first NFT marketplace by volume.
Buy the fall or not?
Nevertheless, doubleQ believes that the upcoming BAYC sale could offer an opportunity to buy NFTs at cheaper prices.
7/ So what can you do to take advantage (or at least protect yourself) from the situation?
Two options:
– Bidding on loans and go for a flip
– Waiting for the mass liquidation to have one of the best entry points ever— doubleQ (@xDoubleQ) August 19, 2022
7/ So what can you do to take advantage of (or at least protect yourself from) the situation?
Two options:
– Bid on loans and go for a flip
– Wait for the massive liquidation to have one of the best entry points
Secondly, Naimish Sanghvi, CEO of India-based cryptocurrency news outlet Coin Crunch, wonders if there would be buyers due to a lack of arbitrage opportunities.
“Your offer has to be more than 95% of the value of the land and more than the amount of the debt,” Sanghvi explained, noting that there could be no room to make money from arbitrage between these values.
“Auctions don’t start until the first bid is made, so there can be several NFTs in limbo at any given time if prices are unfavorable. And that should scare liquidity providers.”
This scenario would have BendDAO wait for borrowers to repay their loans—or wait for liquidators to reappear after a market recovery—to lower their “temporary floating loss.”
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. All investment and commercial movement implies a risk, you must carry out your own investigation when making a decision.
Investments in crypto assets are not regulated. They may not be suitable for retail investors and the full amount invested may be lost. The services or products offered are not aimed at or accessible to investors in Spain.