What is NFT lending?
NFT lending also has a death spiral?
BendDAO Lending Mechanism
The protagonist this time is the well-known BendDAO. Simply put, its mechanism is:
- People who want to borrow money throw NFTs into BendDAO’s pool to stake
- Loan ETH of “30%~40% of the floor price of the project at that time” (these ETHs come from people who want to lend to earn interest)
- The interest rate is regarding 15%~25%
But the price of NFT is floating. If the price of NFT goes to zero, won’t it become a worthless collateral? Therefore, BendDAO designed a “health index” to calculate the index at any time. If it is lower than 1, it will automatically start the 48-hour liquidation process and auction the NFT. Anyone who has entered the liquidation auction process can buy NFTs.
Bear market NFT prices dropLead to serial liquidations, triggering a death spiral crisis
Previous articles have emphasized that NFT lending is not recommended for novice users, please evaluate carefully. As a result, it has only been more than a month, and in the past few days, it has been reported that a large number of blue-chip NFTs (the borrower’s collateral) on BendDAO will be liquidated due to the recent bear market price drop.
Since the transaction price of the liquidation auction can be lower than the floor price at that time, the floor price will be lowered a little more each time it is liquidated, which will trigger more NFTs to enter the liquidation process. The situation seems to be regarding to turn into an unsolvable death spiral.
The spiral suddenly pauses (but it’s not a good thing)
But the embarrassment is that despite the large number of blue-chip NFTs being auctioned at a special price, no one wants to be the liquidator (buy it).
In view of the current sluggish NFT market conditions, the market expects that the price will only get lower and lower, and because BendDAO’s bidding mechanism is not good for liquidators in this situation (there is a minimum price limit and ETH needs to be locked for a period of time following bidding), causing everyone to worry It started to lose money as soon as the bid was made, so there were no bids. Without bids, there will not always be deals below the floor price, thus at least stopping the downward spiral in BendDAO a little (but still not stopping the overall market from affecting the floor price).
Is it a blue chip crash or an entry signal?
Although some people continue to bet that NFTs will fall all the way, there are also voices of “taking the opportunity to buy blue chips at special prices”. Although individuals are optimistic regarding NFT collections and applications for a long time, it is still recommended to observe the market direction before taking action in the short term, at least following this series of firework shows of NFT lending protocols. As the old saying goes, DYOR, please evaluate carefully if you have any investment behavior.