Several owners of Bored Ape Precious Yacht Club (BAYC) and Non-Perishable CryptoPunks (NFTs), who used them as collateral for loans in Ether (ETH), have failed to repay their debts. The situation could lead to the first major NFT sector liquidation event.
BAYC “Death Spiral” featured?
DoubleQ, founder of Web3 launchpad Double Studio, says lending service BendDAO can liquidate up to $55 million from NFTs to recoup its loans, lest the so-called “health factor” of these debts fall below 1.
Notably, the NFT array ground price is important in determining the health factor. BendDAO offers 30% – 40% of the NFT minimum rate as loans. But the protocol sells NFT if its lower price is very close to the amount borrowed – which is the liquidation limit, as shown below.
BendDAO’s NFT Filtering Protocol. Source: the official website
Meanwhile, BAYC’s base price fell from 153.7 ETH in May to 69.69 ETH in August – a drop of nearly 55% in three months. Meanwhile, the health factor of at least 20 loans with BAYC as collateral fell to 1.1 as of August 19, BendDAO data shows.
Borrowers have 48 hours to repay the loan or else 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 an all-time low in the past 12 months,” the analyst warned, adding:
“There is simply not enough volume to save these qualifiers.. it is inevitable.”
BendDAO NFT Holdings Distribution. Source: doubleQ
OpenSea is the leading NFT market by volume.
To buy dip or not?
However, doubleQ believes that the upcoming BAYC liquidation could provide an opportunity to purchase NFTs at cheaper rates.
On the other hand, Naimish Sanghvi, CEO of India-based crypto news outlet Coin Crunch, is wondering if there are any buyers due to the lack of arbitrage opportunities.
“Your bid must be more than 95% of the minimum value and higher than the amount of the debt,” Sanghvi explained, noting that there is no room for making money from arbitrage between these values.
“Auctions do not start until the first bid is submitted, so there may be many NFTs in limbo at a given time if prices are unfavorable. This would scare off liquidity providers.”
This scenario would cause BendDAO to wait for borrowers to repay their loans – or wait for liquidators to re-emerge after the market recovers – to cool off the “temporary floating loss”.
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