28 BAYCs in BendDAO entered liquidation. After the mechanism was updated, the spiral decline of BAYC floor price may become a new risk.
Written by angelilu, Foresight News
The impact of FTX's collapse on the market has spread from major exchanges to the NFT market. According to OpenSea data, the floor price of the blue-chip NFT series Bored Ape Yacht Club (BAYC) has fallen below 50 ETH. As of the time of writing, it is 49.95 ETH. This floor price has fallen by 70.1% compared to the historical high of 153.7 ETH in April this year, setting a new low since 2022.
The drop in BAYC's floor price is closely related to the liquidation event of the NFT mortgage lending platform BendDAO. The NFT series with the highest proportion of BendDAO's collateral value is BAYC. Currently, BAYC accounts for 65.7% of BendDAO's total collateral value.
The direct impact of the sharp drop in BAYC's floor price in BendDAO is that a large number of pledged BAYC are facing liquidation. As early as November 10, BAYC's floor price fell to 57.89 ETH, and there were already 16 BAYC NFTs in the BendDAO liquidation auction.
Image source: Twitter user, part of the image includes MAYC
Since BendDAO's floor price calculation method is based on external oracle feeds, which is slightly different from OpenSea, the floor price of BAYC in BendDAO is 51.02 ETH as of the time of writing. According to BendDAO's auction history, from November 10th to date, 40 BAYCs have entered or are undergoing liquidation auctions.
BendDAO Liquidation Mechanism Introduction
The emergence of BendDAO was originally an innovative use case of NFTFi, which aims to solve the liquidity problem in NFT transactions. This article will focus on briefly describing the two mechanisms of BendDAO related to its blue-chip NFT lending.
The first is the “peer-to-pool” mortgage lending method, and the second is the liquidation mechanism of its NFT collateral.
Its peer-to-pool lending method mainly draws on the collateral lending model of DeFi tokens in Aave, except that it uses blue-chip NFTs as collateral. After the blue-chip NFT holders pledge their NFTs to the protocol, they can borrow ETH at an amount not exceeding 40% of the NFT value. This part of ETH is invested by ETH holders in the protocol reserve pool, and ETH holders also obtain lending income.
BendDAO's original liquidation method is to initiate liquidation of the mortgaged assets when its health coefficient is less than 1. The mortgaged NFT will have a 48-hour liquidation protection time. If the borrower fails to repay the debt in time within 48 hours, the highest bidder in the auction will become the new holder, and the NFT bid requirement in the previous liquidation auction must be higher than 95% of the floor price, and the bid amount of the bidder needs to be locked throughout the auction.
The calculation formula for the health coefficient is: Health coefficient = (floor price * liquidation threshold) / (loan + interest).
In this formula, the liquidation threshold is specified by the protocol. Before the run in August, BendDAO’s liquidation threshold was 90%.
BendDAO August run
In August of this year, BendDAO provided lending services for seven blue-chip NFT series, including BAYC, CryptoPunks, MAYC, Doodles, Space Doodles, and CloneX (currently supporting eight blue-chip NFT series, with Moonbirds newly added). Similar to the current situation, BAYC accounts for 68.8% of the collateral value in BendDAO. As the NFT market became sluggish, BAYC#533, the first in the series to be liquidated and auctioned in BendDAO, kicked off the crisis.
At that time, because the risks of its auction mechanism outweighed the benefits for bidders, no one bid for BAY#533during the liquidation auction. Subsequently, BAYC NFTs were liquidated one after another, and the community's concerns about its operating model and liquidation mechanism erupted. As a result, BendDAO's funding pool was run, and a large amount of liquidity funds were withdrawn. Its reserves once dropped from about 18,000 WETH to less than 15 WETH, and BendDAO was forced to hold the blue-chip NFTs that could not be auctioned.
After the crisis, BendDAO adjusted its liquidation mechanism. A proposal passed on August 23 gradually reduced the liquidation threshold from 90% to 70%, adjusted the auction cycle from 48 hours to 4 hours, and removed the restriction that "the first bid must be 95% higher than the floor price", and adjusted the interest base rate to 20%. Then two more proposals appeared to vote on specific parameters. After the adjustment, BendDAO's fund pool reserves were further increased. The current liquidation threshold is 80%, and the auction cycle is 24 hours.
BendDAO currently has 28 BAYCs entering the liquidation auction
There are currently 329 BAYCs pledged in BendDAO. According to the health factor calculation formula provided above and the modified liquidation threshold and floor price of 51.02 ETH:
1 = (51.02*80%) / (loan + interest), that is, the borrower will face liquidation as long as the loan amount is greater than 40.816 ETH. Currently, 28 BAYCs have been liquidated in BendDAO:
In addition to the BAYC that has been liquidated in the auction, according to BendDAO’s health factor alert list, there are currently 40 BAYC borrowers with borrowing amounts between 35-40 ETH.
Assume the borrower's (loan + interest) is 35, and the floor price of BAYC is a:
1 = (a*80%) / (35), we get a = 43.75
That is to say, if the BAYC floor price continues to drop to 43.75, another 40 BAYCs will face liquidation.
It is worth noting that after the restriction that the minimum bid must be 95% higher than the floor price was removed in August, based on the current price of 51.02 ETH,
51.02 * 95% = 48.469 ETH
The latest bids for the 28 NFTs currently entering auction liquidation are all less than this limit. If the borrower has not repaid the debt at the end of the liquidation protection period, the successful liquidation auction of BAYC may lower the floor price of the NFT series again, causing more NFTs to enter liquidation and entering a vicious cycle.
Will a bank run happen again?
If we compare the current situation with that in August, the BAYC that BendDAO liquidated in August had no one bidding, resulting in a run on the reserve pool funds. The status of the reserve funds after this liquidation will also be a test for its newly revised liquidation mechanism and "peer-to-pool" lending model.
According to Dune data, as of November 14, BendDAO's reserves were 31,387.5 WETH, which fell to 19,848 WETH on November 10, a 62% drop from the peak of 53,079 on November 8.
Although the current reserve pool funds are still much higher than the level during BendDAO's liquidity crisis in August, this round of liquidation has just begun and the market reaction is not yet obvious. The auction results of the 28 NFTs are particularly important. If the BAYC floor price continues to drop, under the influence of the "peer-to-pool" mechanism, depositors' demand for liquidity funds may still easily cause a run.
BendDAO’s Mechanism Improvement
In addition, there is another rule in BendDAO’s liquidation mechanism that if the borrower repays the loan during the liquidation auction, he still needs to pay a fine of about 5% of the bid amount to the first NFT auctioneer. PirateCode.eth, co-founder of BendDAO, once said on Twitter that he was considering optimizing this rule.
BAYC#2335held by BendDAO co-founder PirateCode.eth also entered the liquidation auction on November 11. During its liquidation protection period, ChiChi did not repay the loan. Users who wanted to bid for the NFT at a low price began to gear up, pushing the auction price up to 71.03 ETH. Some community users even joked that PirateCode.eth's liquidity was locked in FTX.
However, with only 4 minutes left before the 24-hour liquidation protection, PirateCode.eth repaid the debt and BAY#2335automatically closed for liquidation. Twitter user Erick also complained on Twitter that in order to bid for the NFT, he not only had to stay up all night until 1 a.m. with three friends.
PirateCode.eth also responded to the tweet, saying that he was delaying repayment because he was testing some functions. As for wasting the bidders' time, they considered whether to distribute half of the borrower's penalty during the liquidation protection period to the first bidder and the other half to the highest bidder.
summary
BendDAO may fall into a dark moment again due to the decline of BAYC. When market liquidity is scarce, NFTs, which already lack liquidity, and NFT derivative protocols will face severe tests. For BendDAO itself, the improvement of mechanisms and early prevention of risks are particularly important. The founder of BendDAO has also stated that it plans to build P2P lending and private lending pools in the future to take into account the liquidity of long-tail NFTs.
