The bear market shows no mercy to products developed with “up only” mechanics.
Last week, it came to light that four Bored Ape Yacht Club (BAYC) NFTs were up for liquidation in a major stress test for the digital assets that were once worth over $400,000 a pop earlier this year.
Users borrowed Ether against their Bored Apes using a protocol called BendDAO, which facilitates NFT-backed lending. As the value of the Apes fell, the ratio of the debt borrowed against that value grew to the point that Bored Apes, as well as tens of Mutant Apes, all still worth over $10,000, became eligible for liquidation.
Now, the BendDAO community has passed a proposal to tweak the levels at which underwater loans will be liquidated. It passed with 97% of voters in favor.
BendDAO’s original design doesn’t allow for liquidations if the highest bid is below 95% of the floor price of the NFT collection.
This put lenders who deposited ETH into BendDAO, in a position where they couldn’t recoup any of their ETH since there were no acceptable bids. The proposal does away with the limiting feature which only allows bids within 95% of the OpenSea floor.
Also, as part of the new proposal, BendDAO will gradually wind down the 90% liquidation ratio to 85% on Aug. 30 and reduce it by a further 5% every week until it hits 70% on Sep. 20th.
This frees up the liquidation process, allowing people to bid much lower than 90% of the floor price. This will allow the auctions to actually clear — bidders can buy the NFTs when the debt comprises 70% of the NFTs’ floor value, rather than being prevented from doing so until it’s below 90%.
Some users in the project’s Discord are angry that liquidations may be coming sooner because of the changes.
Arigatopunk, who made a proposal in BendDAO’s Discord that is nearly identical to the one posted on Snapshot, told The Defiant that it’s a necessary move.
“People are complaining that the proposal rips their NFTs away from them by lowering the liquidation loan-to-value (LTV) threshold,” Arigatopunk said. The trader told The Defiant that they had 1,400 ETH deposited in BendDAO at one point, worth over $2.2M as of Aug. 22.
“They need to understand that it isn’t the LTV threshold that is the problem, it’s the current borrow rate.”
Interest Rate Spikes
The interest rate on outstanding debt spiked to 100% APR on Aug. 22. This happened because BendDAO, like Compound and Aave, automatically increases interest rates when capital is scarce and decreases them when capital is plentiful.
Lenders feared that they would not be able to retrieve their ETH as BendDAO prevented liquidations below 90% of the floor price. As a result, they pulled ETH from the pool, jacking up the interest rate.
The borrowing rate is still a whopping 70% APR, but it looks like some users have been reassured by the proposed changes and deposited ETH, thus bringing down the APR.
The BendDAO proposal also increases the minimum interest rate that borrowers must pay on their debt to 20% from 10%. Arigatopunk’s Discord post didn’t include this mechanic and he disagrees with its inclusion in the proposal.
He thinks BendDAO could be forced to subsidize borrowers with its BEND token in order to make up for the decreased demand stemming from the increased interest rate.
The protocol already does this, but the 20% base rate could force the protocol to increase the BEND emission rate, depleting BendDAO’s treasury sooner.
To be sure, it’s not all doom and gloom.
Tyler, the head of listings at Polygon-based exchange QuickSwap, liquidated a Bored Ape for 73 ETH on BendDAO and announced it on Twitter on Sunday. The acquisition netted the NFT collector his third Bored Ape and he’s not worried that the floor is going to drop too much further.
“I’m trying to time the market but it’s impossible,” he told The Defiant. “I think we are close to the bottom so that’s good enough for me.”
Other opportunistic investors are also making moves. JPEG’d, another NFT-lending protocol, has floated a proposal to allow the DAO to purchase NFTs.
Without directly mentioning BendDAO, the proposal targets NFTs set for liquidations, with the intention being to lock the NFTs on JPEG’d in order to borrow against them and earn yield for the DAO.
A Dune Analytics dashboard shows that 20 NFTs were liquidated on Aug. 23 on BendDAO. Two of those NFTs were Bored Apes and 11 of those NFTs were Mutant Apes.
At the time of writing, however, only one NFT is listed on BendDAO’s Available to Auction page. It’s a Bored Ape — the debt on which outweighs the BAYC floor price by .57 ETH.
Whether that’s a “floating loss” or “bad debt” is a question of semantics.