Lending against NFTs was always going to be a risky affair. But naturally, the idea took off last year during a crazy bull run in the digital assets.
Now, the chickens may be coming home to roost — 14 Mutant Apes, which have a floor price of over $19,000 as of Aug. 19, are in a 48-hour holding period where their owners must pay down their debt or face liquidation.
The information comes from a Dune Analytics dashboard for BendDAO, a five-month-old collateralized lending protocol which facilitated the loans against the NFTs.
BendDAO’s Available to Auction page also shows four Bored Apes entering the 48-hour period. As of 9pm ET on Aug. 19, there isn’t a single bid to liquidate the NFTs if their owners don’t pay down the debt.
The big question is what happens if the floor prices of the collections fall below the debt outstanding against the NFTs during the 48-hour waiting period. At that point, their owners are better off not paying back the debt and letting the NFTs get liquidated. That’s assuming anyone wants them, of course.
‘Temporary Floating Losses’
Addressing such cases, BendDAO’s documentation on liquidations states that “the platform only has a temporary floating loss and no actual losses.”
If a “temporary floating loss” sounds vague, it certainly is. Lenders will be left underwater if no one buys the NFTs and they slip below the value of the interest-accruing debt.
And since this is DeFi, lending is permissionless and is funded by the crypto community at-large — BendDAO’s site shows that the yield on ETH deposits is 8.38% with 5.75% paid in ETH and the remaining 2.63% in the protocol’s native BEND token.
Put simply, it’s a sketchy situation, as BendDAO lenders could be left holding the proverbial bag. There’s another Bored Ape, one Mutant Ape, and four CloneX NFTs on the brink of entering the 48-hour pre-liquidation phase, according to BendDAO’s Health Factor Alert List.
“There’s a ton of red flags,” said Cirrus, an NFT trader who broke the news of the potential liquidations, on a Twitter Space. “No one really knows what’s going to happen, but it is 100% something to pay attention to if you’re active in buying and selling apes.”
It remains to be seen what any potential bad debt incurred by BendDAO’s lenders means for Bored Apes and the Yuga Labs ecosystem. There could be a potential cascade of liquidations, in which the NFTs get liquidated and then resold at a price lower than the current floor. That would set a new, lower floor price, making more NFTs in the collection susceptible to liquidation.
Not everyone is concerned.
“I’m not worried about it. It’s a bear and markets fluctuate. I do feel bad for anyone getting liquidated though,” AngelClarkSays, a Bored Ape holder, told The Defiant.
Hill, who’s listed as a core contributor in the BendDAO Discord, was also optimistic about Bored Apes’ prospects. “If apes can’t recover, who else can?” Hill told The Defiant when asked what would happen if the floor price falls below the debt and never recovers.
Still, it’s an unprecedented time for Bored Apes, which have been nothing short of red hot, reaching a floor of 153.7 ETH, worth over $400,000 at the time, on Apr. 30. Since then, prices have cratered 55%.
We can surmise that the loans at risk of liquidation were taken out near the peak since they are in the 60 ETH range and BendDAO offers a 40% loan-to-value (LTV) ratio on Bored Apes.
NFT Lending Market
The NFT lending market isn’t huge — NFTfi, probably the most well-known protocol, has only $18M in outstanding loans according to a Dune dashboard. At the same time, it can’t be disregarded — NFTfi has generated $244.7M since its inception and outstanding loans hit an all-time high of just over $50M in May.
Despite being lesser known, BendDAO has 16,453 ETH ($27M) in outstanding loans according to the protocol’s homepage.
NFTfi follows a peer-to-peer model for lending. This means that would-be borrowers must list their NFT on the platform and individual lenders agree to the terms of the loan. In case a loan isn’t repaid, the lender receives the NFT.
In contrast, BendDAO’s model puts everyone’s ETH together in a pool and sets the amount of ETH an NFT depositor can borrow on a per-project basis, usually 30% to 40%. Since loans are commingled, there’s no way to assign a certain lender to a particular NFT.
Liquidations for NFTs are more complicated than with fungible assets like ETH. When using ETH as collateral, there is ample liquidity for the asset to simply be sold in the marketplace when a user’s debt hits a liquidation threshold. NFTs however, need bidders.
As such, the nascent NFT lending market is facing its first major stress with the danger of leverage exposed by falling prices. Liquidity in the NFT market remains low, with trading volume on OpenSea hitting a 13-month low on Aug. 16.