The NFT market is in bad shape. While sales are down, a loan protocol is likely to cause the price of many collections to collapse.
The non-fungible token (NFT) market is currently going through a wave of turbulence. After last year’s enthusiasm, sales of digital works are at half mast. The price of many popular collections has contracted.
For instance, Bored Ape Yacht Club Collection (BAYC), based on the Ethereum blockchain, saw its price crash to its lowest level since its inception. Since May, the collection has lost half of its value, despite the interest shown by many celebrities. The monthly volume of sales on OpenSea, the exchange platform, fell to a level not seen in the space of a year.
The NFT sector has been significantly affected by the cryptocurrency crash. Following Bitcoin’s example, altcoins lost a significant portion of their value in the space of a few months. The crypto-asset market, which has more than 18,000 different tokens, is now valued around 1000 billion dollars. At the end of last year, the crypto ecosystem had managed to exceed $3 trillion in market valuation. In a short time, billions of dollars in valuation evaporated. Starved of cash, investors walked away from the NFT market.
On the same theme: This building for sale as an NFT has lost 40% of its value
Lending platform threatens NFT market
In this already complicated context, a platform called BendDAO threatens to jeopardize the entire ecosystem. BendDAO is a lending protocol (“ lending” in the crypto vocabulary). The decentralized platform makes it possible to obtain cryptocurrency loans by depositing NFTs. These digital works are kept as collateral on the blockchain by the protocol.
If BendDAO finds that the value of the NFT deposited as collateral collapses below a certain threshold, the non-fungible token will be automatically put up for sale. The profits from the sale are then used to repay the investor’s loan. Thanks to this method, BendDAO, and other lending services in the decentralized finance sector, do not run out of cash if an investor fails to repay their due.
Note that the cryptocurrencies loaned to the owners of an NFT are provided by other investors. These lend their currencies, Ether in this case, in order to generate interest. The loans offered by BendDAO are instant. As the platform explains on its website, it is possible toobtain ” instantly up to 40% of the value » pledged tokens.
Once the price of the NFTs deposited as collateral falls below a certain threshold, BendDAO prepares to sell the digital works. The protocol has established a 48 hour protection period in the face of market volatility. Clearly, the borrower has 2 days to repay his loan and redeem his NFT.
This mechanism has appealed to NFT holders seeking liquidity. $59 million in non-fungible tokens have been posted as collateral on the protocol, a blockchain analysis shows.
Ok. Long thread on the BendDAO situation:
1) They’ve run out of ETH. There is just 12.5 WETH in the contract.
2) What does this mean? People who slow money to others via BendDAO to buy NFTs on leverage can’t pull their money out. About 15,000 ETH was slow.
— NFTStatistics.eth (@punk9059) August 21, 2022
Unfortunately, the platform is taking the full brunt of the drop in the price of NFTs. As several market watchers explain on Twitter, many digital assets deposited as collateral are close to liquidation. Non-fungible tokens entered the 48-hour period before resale.
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
Several pieces from the Bored Ape Yacht Club collection are in the hot seat. Unfortunately, a plethora of tokens already auctioned on OpenSea are not finding takers. It seems to have a shortage of investors. Only 4 of the 17 Mutant Ape Yacht Club, a collection of NFTs featuring mutant apes, auctioned received a bid on OpenSea. The absence of offers is explained in particular by the constraints of the BendDAO protocol, which requires for example that the resale price be higher than the price of the debt.
These liquidations are likely to have a snowball effect. The multiplication of liquidations will be accompanied by an increase in NFTs offered for sale on OpenSea. De facto, the starting price of the works will drop. Several NFTs were even sold below the floor price. Several collections valued at billions of dollars risk lose value.
At the same time, the frantic liquidations undermine the financial balance of the protocol. Unable to resell NFTs at the floor price, the platform saw its available funds dwindle the last days. On August 22, 2022, there are only approximately 15,000 Ether, or more than 23 million euros, left on the platform. Not all lenders may be able to recover their stake.
The platform reacts
Aware of the situation, the decentralized autonomous organization behind the BendDAO protocol is preparing to make important changes. An adjustment proposal was unveiled by the organization’s co-founder. This proposal suggests modifying the parameters of forced sales.
“We are sorry that we underestimated how badly NFTs could ride through a bear market when setting initial parameters. Over the past few days we have received tons of comments and suggestions from the community”admits BendDAO.
The initiative notably plans to raise the liquidation threshold to 70% and reduce the protection period to four hours. The proposal is currently in the process of voting by members of the organization. We bet that the measures can avoid the crash of the NFT market.
Vote now! 🗳️ https://t.co/ZDcyzfRWoP
— BendDAO.eth (@BendDAO) August 22, 2022