NFT market cooling NFTFi can’t play anymore

The market-leading NFT lending protocol BendDAO recently fell into a run-off crisis. A large number of ETH deposits have been withdrawn from it over the past week. As of 4 pm on August 23, the loan utilization rate of the protocol reached 99.26%, and the available liquidity was only 90.03ETH. This means that the vast majority of ETH depositors cannot immediately withdraw their assets from the protocol.

As the first NFT liquidity protocol based on “decentralized peer-to-peer pool” in the market, BendDAO currently provides a mortgage lending market for 7 blue-chip NFT series such as BAYC and CryptoPunks. Accordingly, depositors can deposit ETH to earn Take interest.

However, with the cooling of the NFT market, BendDAO’s depositors found that when the NFT collateral triggered liquidation, due to insufficient market liquidity, it was difficult for the collateral to be sold immediately and the loan to be repaid. The risk of bad debts greatly increased, and large-scale runs followed. Come.

In any financial market, liquidity is usually the basis for the performance of financial applications, but in the NFT market lacking liquidity, fast transactions and simple lending are difficult to achieve, and the healthy operation of NFTFi applications is facing challenges.

NFT lending protocol BendDAO suffers a run on

Due to the arrival of the “NFT bear market”, the market-leading NFT lending protocol BendDAO is experiencing a run-on crisis.

The crisis started to emerge in mid-August. From August 14th to 19th, BendDAO liquidated more than 10 blue-chip NFTs for lending ETH collateral. As the NFT boring ape BAYC began to be liquidated, the internal economic system of BendDAO experienced a domino-like collapse.

On August 19, the floor price of BAYC fell below 70 ETH, and BendDAO began to liquidate the boring monkey for the first time. Soon, users who pledged ETH in BendDAO in order to reap the interest noticed that the situation was going out of control.

Before diving deeper into this liquidity crisis, it is necessary for you to know how BendDAO works.

As the first NFT liquidity protocol based on “decentralized peer-to-peer pool” in the market, BendDAO provides a liquidity market for blue-chip NFT mortgage lending. Depositors can earn interest by providing liquidity in ETH to lending pools, while borrowers can lend ETH through lending pools using specific kinds of blue-chip NFTs as collateral.

In view of the fact that the liquidity of NFT cannot be compared with that of homogenized tokens, BendDAO has only supported 7 blue-chip NFT series such as BAYC Boring Ape, CryptoPunks and Azuki as collateral supply in order to prevent NFT from being unable to liquidate in time due to insufficient market liquidity. borrowing. At the same time, users who mortgage NFT can only lend ETH worth up to 40% of the current floor price.

NFT market cooling NFTFi can't play anymore

BendDAO currently supports 7 blue-chip NFT series mortgage lending

According to the liquidation rules, when the loan amount/collateral floor price reaches 90%, liquidation will be triggered, and then BendDAO will list the mortgaged NFT to the auction market. Considering the volatility of the NFT market, holders can still repay the loan within 48 hours even if they enter the liquidation auction. However, if the NFT floor price falls below the threshold and no one continues to buy it, eventually BendDAO and the lender will bear the debt.

From the perspective of mechanism setting, BendDAO has fully considered NFT market volatility and liquidity risks at the beginning of its establishment. However, the decline in blue-chip NFT prices still exceeded BendDAO’s expectations.

According to NFTGo data, in the past 3 months, the floor price of BAYC Boring Ape has dropped from a maximum of 98ETH to 66.9ETH, a drop of 31.7%; the floor price of CryptoPunks has dropped from a maximum of 84ETH to 66ETH, a drop of 21.4%.

As the price continues to fall, NFTs have entered the liquidation process one after another, and the liquidation process has high requirements for liquidity. Soon, it was found that when an NFT triggered liquidation and was listed on the auction market, not many people were willing to participate in the auction, which greatly increased the risk of bad debts.

As a result, users with ETH deposits on BendDAO took their funds, and a run occurred. On August 21, 0 xTIGΞR, the co-founder of Umbra Labs, tweeted that within 30 minutes from 15:52 on August 20, Beijing time, 9,640 ETHs were withdrawn from BendDAO, exceeding 35% of all ETHs deposited on the platform. .

As of 4:00 pm on August 23, the ETH deposited in BendDAO was 12,181.54, and a total of 12,091.51 ETH had been lent out. The loan utilization rate reached 99.26%, and the available liquidity was only 90.03 ETH. This means that the vast majority of ETH depositors cannot immediately withdraw ETH from the protocol, they can only wait for the NFT stakers to actively repay the loan to release liquidity, or the NFT in the auction can be successfully liquidated.

Insufficient liquidity makes it difficult for NFTFi applications to operate

As the representative agreement of NFTFi, BendDAO encountered a run-off crisis this time, which seriously damaged the confidence of the industry in NFT derivative financial products. People are beginning to realize that in the NFT trading market, the most frightening thing is not the price crash, but the collapse of liquidity.

From the perspective of BendDAO’s mechanism, it imitates mainstream DeFi lending protocols such as Aave, that is, users over-collateralize assets and lend other assets. When the collateral value falls to a certain threshold, liquidation is triggered, and the protocol will automatically sell the collateral to repay the loan.

However, this set of business logic that works well in DeFi fails in NFTFi. Since NFTs cannot be sold immediately in the market like homogenized tokens, in a market environment with poor liquidity, “liquidation” has become a false proposition. If the outside world is pessimistic about the subsequent market trend of NFT collateral, it is likely that no one will take over. Collateral situation, resulting in collateral falling into the hands of the agreement and the lender.

At the same time, the mechanism setting of BendDAO further reduces the enthusiasm of the market to take over the collateral.

According to the mechanism of BendDAO, the ETH of the auction participants needs to be locked for 48 hours, and the auction bid must be greater than 95% of the NFT floor price. This means that even if the auction is successful, auction participants may only have a maximum profit margin of 5%. The premise of obtaining this 5% profit is that the NFT can be sold at the current floor price immediately after the auction is completed. However, since most of the blue-chip NFTs backed by staking in BendDAO are expensive and most retail investors are unable to participate, its liquidity is not destined to be very high.

In addition, when ETH itself fluctuates violently, BendDAO’s requirement to lock ETH for 48 hours will also make auctioneers hesitant. After all, no one can predict the trend of ETH during the lock-up period.

In order to get out of the current predicament, BendDAO released a new proposal on August 22, which proposed to gradually reduce the liquidation threshold from 90% to 70%, adjust the auction cycle from 48 hours to 4 hours, and cancel the “first bid is higher 95% of the floor price” limit. As of 5:00 p.m. on August 23, the proposal had a 97.13% approval rate, with a high probability of being passed.

NFT market cooling NFTFi can't play anymore

BendDAO initiates a proposal to modify protocol parameters

BendDAO adjusts its rules in an attempt to give the market more room to clear. But the problem is that for NFT stakers, the adjustment of the liquidation threshold to 70% greatly increases the liquidation risk. Some community members believe that while the proposal could boost depositor confidence, it may lead to more hasty liquidations of NFTs.

This difficult proposal is the epitome of the current embarrassment facing NFTFi. In any financial market, liquidity is usually the basis for the performance of financial applications, but in the illiquid NFT market, it is difficult to achieve fast transactions and simple lending.

Twitter user “CryptoXavierLee” analyzed that in 2021, the transaction volume of a certain NFT project will often exceed the total market value, which is a sign of healthy market data. In the second half of this year, the market value of NFTs appears to be higher than in 2021, but the liquidity is lower compared to the same period. “The essence behind the seemingly prosperous high market value is the proliferation of NFT issuance, but the market does not have enough liquidity support.”

Today, the NFT market shows no signs of improving. According to data from Dune Analytics, the monthly trading volume of NFTs on the Ethereum chain of the OpenSea platform has dropped sharply from $4.857 billion in January this year to $528 million in July. Since the beginning of August, the data is only $368 million, almost Back to the level when NFTs were just emerging.

In stark contrast to the greatly diminished transaction volume, according to the data of NFTScan on August 20, the Ethereum network added 1.9797 million NFT assets in the past week, and an average of 282,800 NFT assets were minted every day.

There are more and more NFTs, but the transaction volume is less and less. The market phenomenon of oversupply shows that the hype of NFTs tends to cool down, and people are no longer willing to spend a lot of money to pay for “pictures”. When liquidity is scarce, NFTFi also loses its application base.

Posted by:CoinYuppie,Reprinted with attribution to:
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