A major liquidation in the NFT market is potential on the horizon. The web3 lending protocol BendDAO is attracting hordes of NFT holders to keep their non-fungible assets as collateral and take ETH loans. Fears of liquidation escalated when a BAYC whale (Bored Ape Yacht Club) borrowed over 10,000 ETH from the platform.
Currently, there is $59 million (32,267 ETH) worth of NFTs being used as collateral on BandDAO and it’s increasing every hour. Almost 85% of the loans are taken on BAYC and MAYC (Mutant Ape Yacht Club) collaterals.
What is BendDAO?
BendDAO is a web3 lending protocol for NFT holders. Ethereum (ETH) holders can deposit their assets on the platform to provide liquidity and earn interests (8.15% APR). On the other hand, NFT holders can borrow ETH against their non-fungible assets. According to the platform creators, this increases the utility of digital assets.
In a broader sense, non-fungible tokens only provide a sense of ownership of digital art. However, BendDAO allows users to actually receive monetary benefits through such assets, beyond just flexing its ownership.
Users can borrow up to 40% of the collection’s floor price. However, if its floor price drops closer to the value of the loan, the platform can liquidate the NFT and put it up for auction. In this case, the borrower is given only 48 hours to repay the loan or their asset will be liquidated.
Why the NFT market might crash?
The price of non-fungible tokens depends on market volume. When the overall volume drops, the floor prices of all collections will also drop. The lower the floor prices get, the more chances that it will be near the loan amount, thus increasing the chances for liquidation.
BendDAO calculates the chances of liquidation through a term called ‘health factor’. It represents the safety of a user’s deposited NFT against the loaned ETH value. When the health factor reaches 1, the deposited assets are put up for auction by the platform. Currently, there are 45 BAYC on the platform with a health factor of below 1.2.
If more high-value NFTs reach a low health factor on BendDAO, it could cause a liquidation cascade. What’s worse? The daily volume of non-fungible tokens is drastically dipping on OpenSea, indicating that floor prices are also about to go down.
The overall DeFi market is already suffering from liquidation worries, after the popular crypto lending platform, Celsius went bankrupt last month. Another similar event in the NFT market can have crippling consequences on the industry.