Many owners of valuable Bored Ape Yatch Club and CryptoPunks nonfungible tokens (NFTs) who used them as collateral for Ether (ETH) loans have failed to repay their debts. The situation could lead to the first massive liquidation event in the NFT sector.
Bored Ape downfall on the way?
DoubleQ, the founder of Web3 launchpad Double Studio, claims that lending service BendDAO could liquidate up to $55 million in NFTs to recover its loans, fearing that the debts’ “health factor” will fall below one.
Notably, the floor price of an NFT collection is essential in determining the health factor. BendDAO loans out 30%-40% of the NFT’s floor price. However, if the NFT’s floor price falls too close to the amount borrowed, the protocol sells it.
Meanwhile, the BAYC floor price has dropped from 153.7 ETH in May to 69.69 ETH in August, a nearly 55% drop in three months. Simultaneously, according to BendDAO data, the health factor of at least 20 loans with BAYC as collateral has fallen to 1.1 as of Aug. 19.
Borrowers have 48 hours to repay the loan or have their NFT collateral liquidated. Given BendDAO’s exposure to other NFT projects, including CryptoPunks and Doodles, these liquidations could result in “a death spiral for the BAYC ecosystem and NFT market as a whole,” according to doubleQ.
“OpenSea volume is at its lowest in the last 12 months,” the analyst cautioned.
To buy or not to buy the dip?
Nonetheless, doubleQ believes that the upcoming BAYC liquidation may provide an opportunity to purchase NFTs at a lower price. Naimish Sanghvi, CEO of India-based crypto news outlet Coin Crunch, on the other hand, questions whether there will be any buyers due to a lack of arbitrage opportunities.
“Your bid must be greater than 95% of the floor value and greater than the debt amount,” Sanghvi explained, noting that there was no room for profit from arbitrage between these values.
“Because auctions do not begin until the first bid is placed, several NFTs may be in limbo at any given time if prices are unfavorable. That should frighten the liquidity providers.”
BendDAO would have to wait for borrowers to repay their loans or for liquidators to reappear after a market recovery, in this scenario, to offset its “temporary floating loss.”