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“Blue Chip” NFTs in Danger of Being Liquidated Leads to a Bank Run

tl;dr Summary: Depositors on the popular NFT lending platform BendDAO removed their assets, plummeting its reserves to as low as 5 ETH on Sunday. This occurred after dozens of BendDAO loans entered the platform’s danger zone at the end of last week, putting the NFTs used as collateral at risk of liquidation. 

Non-fungible token (NFT) floor prices continue to drop, especially for the top collections like BAYC (Bored Ape Yacht Club) and CryptoPunks, which fell by almost 20% and 12% in just 14 days. 

Dozens of Bored Ape Yacht Club NFTs used as collateral for loans on BendDAO are on the verge of being auctioned, raising concerns that additional liquidations would follow.

BendDAO, a peer-to-peer lending platform, allows users to borrow ether (ETH) against their NFTs. Customers can often borrow 30% to 40% of the NFT collection’s floor price, or the minimum amount to purchase one on the open market, with the NFT as collateral.

With the floor prices nose-diving, BendDAO loans started to move into a danger zone defined by a “health factor” of less than one on their platform, indicating that the NFT used as collateral is about to be liquidated. For example, if your BAYC is worth 100 ETH, you can instantly borrow 40 ETH. However, if the floor price of BAYC falls below 44 ETH, the 48-hour liquidation mechanism is triggered.

Source: https://www.benddao.xyz/app/auction/health-factor-alert-list

As several loans started to get a low health factor, depositors started withdrawing their assets as they felt the lenders would fail. BendDAO’s reserves hit a bottom of just five wETH from over 10,000 wETH on Sunday after this mass withdrawal of assets.

But the trouble for BendDAO does not stop here, as it now must sell the NFT collateral it received post liquidation. The way it does this is by auctioning these NFTs on its platform.

The bid price is hard coded within the smart contract, which ensures that only those bids are allowed through which the platform can pay back the depositors. And, since the market is not favorable now, no one is willing to bid at the price set, forcing BendDAO to keep these illiquid assets on their books instead of ETH.

To address these issues, BendDAO and its community proposed a set of changes to its protocol. The proposal numbered BIP#9 started on August 22 and was closed the next day as it passed overwhelmingly by 97% of the votes. 

In the proposal, the team starts by acknowledging they underestimated how illiquid NFTs can get in a bear market, which they had not factored in when setting up the initial parameters of the protocol before listing out these proposed changes.

1) Liquidation threshold, or the bidding price, to be gradually reduced to 70% of the floor price from the current 95% by September 20.  

2) Reduce the auction period to 4 hours from the current 48 hours to improve liquidity for auctions.

3) Remove the first bid limitation of 95% of the floor price, meaning that the gap between the floor and the starting bid price will be much wider than before.

4) Increase the APR on ETH deposits to 20% to encourage more depositors and NFT holders to repay in ETH.

These are welcome changes, and some hope to capitalize on good deals as these changes go in over the next month. 

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