The BAYC floor price has dropped below 50E, will the spiral decline trigger another BendDAO liquidation storm?

Written by: angelilu, Foresight News

The impact of the FTX 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, currently at 49.95 ETH. This floor price has dropped by 70.1% from this year's historical high of 153.7 ETH in April, reaching a new low since 2022.

The decline in the BAYC floor price is closely related to the liquidation events of the NFT collateral lending platform BendDAO, where BAYC is the NFT series with the highest collateral value, currently accounting for 65.7% of BendDAO's total collateral value.

In BendDAO, the significant drop in the BAYC floor price directly impacts a large number of mortgaged BAYC NFTs facing liquidation. As early as November 10, the BAYC floor price fell to 57.89 ETH, and there were already 16 BAYC NFTs in liquidation auction on BendDAO.

Image source: Twitter user, showing part of MAYC

Since BendDAO's floor price calculation is based on external oracle pricing, it slightly differs from OpenSea, with the BAYC floor price in BendDAO at 51.02 ETH at the time of writing. According to BendDAO's auction history, since November 10, 40 BAYC NFTs have entered or are currently undergoing liquidation auctions.

Introduction to BendDAO's Liquidation Mechanism

BendDAO was originally an innovative use case for NFTFi, aimed at solving liquidity issues in NFT trading. This article will briefly outline two mechanisms related to BendDAO and its blue-chip NFT lending.

First is the "peer-to-pool" collateral lending method, and second is its NFT collateral liquidation mechanism.

The peer-to-pool lending method mainly draws from the collateral lending model of DeFi tokens in Aave, but uses blue-chip NFTs as collateral. Blue-chip NFT holders can mortgage their NFTs to the protocol and borrow ETH up to 40% of the NFT's value. The ETH for this borrowing comes from ETH holders who contribute to the protocol's reserve pool, allowing them to earn lending income.

BendDAO's original liquidation method was to initiate liquidation when its health factor fell below 1. Mortgaged NFTs would have a 48-hour liquidation protection period. If the borrower did not repay the debt within 48 hours, the highest bidder in the auction would become the new owner. The bidding requirement for NFTs in liquidation auctions must exceed 95% of the floor price, and the bid amount must be locked throughout the auction.

The health factor is calculated using the formula: Health Factor = (Floor Price * Liquidation Threshold) / (Loan + Interest).

In this formula, the liquidation threshold is set by the protocol. Before the run on the bank in August, BendDAO's liquidation threshold was 90%.

BendDAO's August Run on the Bank

In August 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 added). Similar to the current situation, BAYC accounted for 68.8% of the collateral value in BendDAO. The first BAYC to be liquidated in BendDAO was BAYC#533, marking the beginning of this crisis.

At that time, due to the auction mechanism, the risk for bidders outweighed the rewards, resulting in no bids for BAYC#533 during the liquidation auction. Subsequently, more BAYC NFTs were liquidated, leading to community concerns about its operational model and liquidation mechanism, which triggered a run on BendDAO's liquidity pool. The reserve dropped from about 18,000 WETH to less than 15 WETH, forcing BendDAO to hold blue-chip NFTs that could not be auctioned.

After the crisis emerged, BendDAO adjusted its liquidation mechanism. A proposal passed on August 23 link gradually lowered the liquidation threshold from 90% to 70%, adjusted the auction period from 48 hours to 4 hours, and removed the requirement that "the first bid must be higher than 95% of the floor price." The base interest rate was adjusted to 20%. Subsequently, two more proposals were voted on to adjust specific parameters, and BendDAO's reserve was improved, with the current liquidation threshold set at 80% and the auction period at 24 hours.

Currently, 28 BAYC NFTs Have Entered Liquidation Auctions in BendDAO

Currently, there are 329 BAYC NFTs mortgaged in BendDAO. Based on the previously provided health factor calculation formula and the modified liquidation threshold with a floor price of 51.02 ETH:

1 = (51.02 * 80%) / (Loan + Interest), meaning that as long as the borrower's loan amount exceeds 40.816 ETH, they face liquidation. Currently, there are 28 BAYC NFTs in liquidation auction:

In addition to the BAYC NFTs currently in liquidation auction, according to BendDAO's health factor alert list, there are still 40 BAYC borrowers with loan amounts between 35 - 40 ETH.

Assuming the borrower's (Loan + Interest) is 35, and the BAYC floor price is a:

1 = (a * 80%) / (35), we find a = 43.75.

This means that if the BAYC floor price continues to drop to 43.75, another 40 BAYC NFTs will face liquidation.

It is worth noting that after the removal of the requirement that the minimum bid must be higher than 95% of the floor price in August, calculating with the current price of 51.02 ETH:

51.02 * 95% = 48.469 ETH.

Currently, the latest bids for the 28 NFTs entering liquidation auction are all below this limit. If the liquidation protection period ends and the borrower has not repaid the debt, the successful liquidation auction of BAYC may further lower the floor price of this NFT series, leading to more NFTs entering liquidation, creating a vicious cycle.

Will a Run on the Bank Happen Again?

Comparing the current situation to August, the lack of bids for BAYC during the August liquidation led to a run on the reserve pool. The state of the reserve funds after this liquidation will also test its newly modified liquidation mechanism and the "peer-to-pool" lending model.

According to Dune's data, as of November 14, BendDAO's reserves stood at 31,387.5 WETH, having dropped to 19,848 WETH on November 10, down 62% from the peak of 53,079 WETH on November 8.

Although the current reserve pool funds are still far above the levels during BendDAO's liquidity crisis in August, this round of liquidation has just begun, and the market response is not yet apparent. The auction results for these 28 NFTs in liquidation are particularly important. If the BAYC floor price continues to drop, the demand for liquidity funds from depositors under the influence of the "peer-to-pool" mechanism may still easily trigger a run on the bank.

Improvement of BendDAO's Mechanism

Additionally, in BendDAO's liquidation mechanism, there is a rule that during the liquidation auction, if the borrower repays the loan, they still need to pay a penalty to the first bidder of the NFT auction, approximately around 5% of the bid amount. BendDAO co-founder PirateCode.eth has mentioned on Twitter that they are considering optimizing this rule.

BendDAO co-founder PirateCode.eth's BAYC #2335 also entered liquidation auction on November 11. During its liquidation protection period, he did not repay the loan, and users wanting to buy the NFT at a low price began to get ready, pushing the auction price up to 71.03 ETH. Some community users even joked about whether PirateCode.eth's liquidity was locked in FTX.

However, just 4 minutes before the 24-hour liquidation protection period ended, PirateCode.eth repaid the debt, and BAYC#2335 was automatically removed from liquidation. Twitter user Erick complained on Twitter about bidding for this NFT, stating that not only did he stay up until 1 AM, but he also had three friends join him.

PirateCode.eth also replied to the tweet, indicating that his delay in repayment was for testing some functions. Regarding the wasted time of the bidders, he is considering whether to allocate half of the penalty for borrowers during the liquidation protection period to the first bidder and the other half to the highest bidder.

Conclusion

BendDAO may once again fall into dark times due to the drop in BAYC. When market liquidity is scarce, NFTs, which already lack liquidity, along with NFT derivative protocols, will face severe tests. For BendDAO itself, improving mechanisms and preventing risks in advance are particularly important. The founder of BendDAO has also stated plans to build P2P lending and private lending pools in the future to address the liquidity of long-tail NFTs.