The NFT market on the brink of the abyss because of the BendDAO protocol

NFT market one step away from the apocalypse – During 2021, the NFT market experienced unprecedented growth. Bored Ape, CryptoPunk and many other collections have seen their prices skyrocket. However, the fall of the crypto markets has also impacted the NFT ecosystem. So much so that the latter would be on the verge of disaster because of the BendDAO protocol.

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BendDAO: the NFT lending platform

We are all more or less accustomed to lending protocols (ready) decentralized. In practice, these allow users to make loans, by blocking cryptocurrencies as collateral in return.

If the value of the collateral decreases and approaches the borrowed value, the protocol will sell the collateral to repay the loan. This mechanism allows lending protocols to remain solvent and avoid bad debts.

Faced with the rise of NFTs, the creators of BendDAO had a bright idea. So they created a lending platform specializing in NFTs.

Thereby, BendDAO brings together two types of users:

  • The liquidity providerswho deposit ETH to generate income on it;
  • The NFT holderswhich can borrow ETH by depositing NFTs as collateral.

To ensure the sustainability of the loans, the floor price (floor price) of the NFT must be 30-40% higher than the borrowed value.

Unsurprisingly, this protocol has met with significant success. In total, the equivalent of $59 million in NFT has been collateralized on the protocol.

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BendDAO facing the fall of the crypto and NFT markets

Nevertheless, NFTs are just as subject to price changes as cryptocurrencies. Thus, the recent fall in the crypto market has obviously also impacted the NFT market.

Bad news for BendDAO, who may well know a winding-up cascade. This was revealed @CirrusNFT in a thread Twitter.

Indeed, more and more loans collateralized by NFTs are approaching liquidation. This is governed by a health factor. It calculates the ratio between the value of the collateral and that of the loan.

If you let your loan health factor fall below 1, your NFT is auctioned for 48 hours and sold to the highest bidder if you don’t repay the loan on time. »

This situation could prove to be dramatic for several renowned NFT collections.

The case of Bored Ape and Mutant Ape NFTs deposited on BenDAO

As pointed out by CirrusNFT, 2.8% of BAYCs and 1.6% of MAYCs are currently deposited on the BendDAO protocol.

Faced with falling prices, the value of these NFTs has fallen dramatically since their ATH. Therefore, several liquidations have already been recorded on the BendDAO protocol. A total of 15 MAYCs are currently for salebelow the floor price on BendDAO.

We saw the first mutant liquidations due to low health factor loans this week. Unless borrowers suddenly start repaying their loans en masse, chances are we’ll see more in the near future. »

As we have just seen, NFTs to be liquidated are sold to the highest bidder. This action could result in lowering the floor price of these collections.

If the floor price goes down, then further liquidations can be triggered, lowering the floor price again.

Thus, it is possible to enter a spiral of liquidation. In this case, each liquidation will generate other liquidations, inevitably dragging the floor price of these collections down.

On August 18, the first liquidation of a BAYC was recorded. So the#533 was listed for sale by the protocol at 68.4 ETH, almost 4 ETH below the floor price.

NFT BAYC #533 about to be liquidated on BendDAO.
NFT BAYC #533 about to be liquidated on BendDAO.

It remains to be seen whether the holders of these NFTs will manage to pay their loans on time, or whether these NFTs will be liquidated. If there is a liquidation, and it leads to a liquidation spiral, it could mark the biggest price drop for Yuga Labs collections.

At the same time, the Bored Ape community could well see its own NFT trading platform emerge. Indeed, Magic Eden wishes to set up an NFT market which uses the APE token as a currency of exchange.

Safeguard your NFTs in your wallet rather than as collateral on a lending platform. Stock up on ETH while waiting for better days. Register now on the PrimeXBT platform (commercial link).

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