TL;DR
A large number of Bored Apes Yacht Club NFTs are approaching mass liquidation on the BendDAO borrows and collateral platform, this could lead to a collapse of the entire non-fungible token market.
NFT's Bluechip borrowing/collateral is emerging as a new trend in the DeFi world.
What is BendDAO and how NFTs work as collaterlas.
BendDAO is a platform that lends in ETH to users who use their Blue Chips as collaterals. Typically, users can get up to 30-40% of the base price of the NFT they put on the platform.
However, if the minimum price of the asset in question falls to a certain level, the platform forcibly puts the NFT up for auction.
This liquidation level is determined by the "health factor" of the loan secured by the digital asset. When the value of this metric falls below 1, the token automatically enters a 48-hour liquidation protection state in which the owner can choose to pay off the debt and recover the token.
If the user fails to pay off the loan, the non-fungible token is auctioned off and the highest bidder is awarded it.
The Problem?
What is happening with Bored Apes is that many BAYC owners have been borrowing ETH using BendDAO's borrow, and a significant number of these users are currently at risk of liquidation as the floor price of the collection has dropped significantly in recent weeks.
As BendDAO's health factor alert list shows, a large amount of BAYC-backed debt is very close to falling below 1:
Our analysts fear that a possible consequence of these BAYC liquidations may be the collapse of the entire NFT market.
Thesis
When these Bored Ape borrows with health factor values close to level 1 begin to fall below the floor, the resulting liquidations will drive floor prices down further. This would mean that more debt secured by the assets, will drag the collection toward mass liquidation.
After that, liquidations could cascade and damage the entire NFT ecosystem, not just that of Bored Apes Yacht Club.
It should also be considered that monthly volume on OpenSea, the most popular marketplace for non-fungible tokens, recently hit its lowest in 12 months:
This volume is low enough that the entire NFT market may experience a ripple effect from these large liquidations of Bored Apes' loans on BendDAO.
Conclusion
This is one of the issues we are most passionate about, and we are trying to figure out what might be a sustainable strategy to be able to offer loans using non-fungible tokens as collateral. We believe that NFTs as collaterals will be a reality in the near future, however, we do not think that the structure proposed by BendDAO is sustainable in the short to medium term.
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