Nearly $55M worth of Bored Ape, CryptoPunks NFTs risk liquidation amid debt crisis
Many owners of precious Bored Ape Yacht Club (BAYC) and CryptoPunks NFTs, who used them as collateral to take out loans in Ether (ETH), have failed to repay their debts. The situation could lead up to the NFT sector's first massive liquidation event.
gm.As a result of the floor dropping to 72, the first BAYC liquidation auction on BendDAO has begunStarting price of 68.4e...Any takers or is this going to be the first bad-debt domino that falls for the platform? — Cirrus (@CirrusNFT) August 18, 2022
BAYC "death spiral" incoming?
DoubleQ, the founder of web3 launchpad Double Studio, says lending service BendDAO could liquidate up to $55 million worth of NFTs to recover its loans, fearing the so-called "health factor" of these debts could fall below 1.
Notably, an NFT collection's floor price is important in determining the health factor. BendDAO offers 30%-40% of the NFT's floor price as loans. But the protocol sells the NFT if its floor price falls too close to the amount borrowed—a liquidation threshold, as explained below.
Meanwhile, the floor price of BAYC has fallen from 153.7 ETH in May to 69.69 ETH in August—a nearly 55% plunge in three months. Simultaneously, the health factor of at least 20 loans with BAYC as collateral has fallen to 1.1 as of Aug. 19, data on BendDAO shows.
4/ Why is this a problem?There are currently 20 BAYCs with under 1.1 health factorAnd wayyyy more under 1.2Meaning, all of those apes WILL get liquidated, soon. — doubleQ (@xDoubleQ) August 19, 2022
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 NFT market as a whole," given BendDAO's exposure to other NFT projects, including CryptoPunks and Doodles.
"OpenSea volume is at the lowest point ever in the last 12 months," the analyst warned, adding:
"There's simply not enough volume to save these liquidations.. It's inevitable."
OpenSea is the leading NFT marketplace by volume.
To buy the dip or not?
Nevertheless, doubleQ believes the incoming BAYC liquidation could offer an opportunity to buy the NFTs at cheaper rates.
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
On the other hand, Naimish Sanghvi, CEO of India-based crypto news outlet Coin Crunch, wonders if there would be any buyers due to a lack of arbitrage opportunities.
"Your bid has to be more than 95% of the floor value and higher than the debt amount," explained Sanghvi, noting that there could no room for making money from arbitrage between these values.
"The auctions don’t begin until the first bid is placed, so there may be several NFTs in limbo at a given point in time if the prices are unfavorable. And that should scare the Liquidity providers."
This scenario would have BendDAO wait for borrowers to repay their loans—or to wait for the re-emergence of liquidators after a market recovery—to subside its "temporary floating loss."
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