BAYC loan death spiral could wipe out the entire NFT market

30,300 ETH or $55 million worth of NFTs is on the line, as BendDAO is likely to liquidate a large amount of blue-chip NFTs with low health scores, crypto analyst doubleQ warns on Twitter.

As floor prices of NFTs deposited on BendDAO keep tanking, borrowers are forced to either repay their debts or see their assets liquidated, which can cause a domino effect for the already stagnating digital collectibles market.

BendDAO is a peer-to-pool lending and borrowing protocol where NFT holders can deposit their assets as a collateral in exchange for a short-term ETH loan. Users can also lend Ether for a certain interest rate. Typically, NFTs are collateralized at 30%-40% of the floor price, which means that for a BAYC worth 100 ETH its owner can receive a 30 to 40 ETH loan at a 15%-25% interest rate.

However, as the floor price for most NFT collections listed on BendDAO plummeted by 18%-39% in the last 30 days, the health factor of loans dropped as well, increasing the likelihood of liquidations. Positions with a score between 1 and 1.5 are considered risky, and borrowers are advised to repay a part of their debt. When the health factor drops below 1, users have 48 hours to return the loan or see their NFT being sold to the highest bidder.

According to crypto research firm Delphi Digital, BendDAO has liquidated 12 NFTs since August 14, and more such liquidations may be around the corner. Currently, 1,028 NFTs that are worth 30,641 ETH are deposited on the protocol.

“Out of these, 320 are considered to have risky health scores. This equates to 48% of BAYCs collateralized, 31% of MAYCs, 16% of Azukis, 42% of CloneXs, and 32% of Doodles,” the report reads.

Bluechip NFTs collateralized for ETH loans on BendDAO, chart by Delphi Digital.
Image: Delphi Digital

Unless borrowers suddenly start repaying their loans en masse, the liquidations spiral seems almost inescapable.

Opensea volume is at the lowest point ever in the last 12 months. There's simply not enough volume to save these liquidations,” doubleQ tweeted. “It's inevitable.”

Although BendDAO accounts just for 2.72% supply of BAYC and 1.59% supply of MAYC, a couple dozen of NFTs liquidated can put a fair amount of pressure on the collections’ floor prices. As a result, even more apes deposited on other platforms would come on the auction block, further spreading market contagion.

To take advantage of the situation, doubleQ suggests his followers participate in auctions to make quick profits, or simply use the moment as the best buying opportunity in years.

“Personally, I go with option 2, convert most of my assets to stables, waiting for the next leg down and scoop up ETH & NFTs for fire sale price,” a crypto analyst wrote.

“NFA [not financial advice]. If you follow me and get rekt that's on you,” he added.