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NFT Liquidations Rise Amid Azuki and Pudgy Penguin Volatility

Two of the NFT market’s leading collections have suffered sharp price drops over the last week, leading to outstanding bad debt on lending protocols.
By: Squiffs • January 28, 2025
NFT Liquidations Rise Amid Azuki and Pudgy Penguin Volatility

NFTs are taking a beating in 2025, and liquidation fears are rising among Azuki and Pudgy Penguin NFT holders.

Earlier this morning, there were over 150 underwater Pudgy Penguins ecosystem loans through Blend, Blur’s NFTFi protocol, and hundreds of underwater Azuki loans on NFT lending protocol, BendDAO, after borrowers took advantage of the protocol’s slow oracle.

Pudgy Penguins Active Loans - Blend
Pudgy Penguins Active Loans - Blend

Most underwater loans within the Pudgy Penguins ecosystem are on the secondary collection, Lil Pudgies. There are currently 81 Lil Pudgies with loan-to-value (LTV) ratios of greater than 100%.

The bad debt is a result of widespread volatility in the respective ecosystems. Azukis plummeted from a floor price of 11 ETH to 3.75 ETH following the release of the ANIME token on Jan. 24, and Pudgy Penguins dropped from 17 ETH to 11 ETH within 24 hours after it was unveiled that Pudgy Penguins may not directly receive an Abstract token allocation.

For the Pudgy Penguins ecosystem, and Lil Pudgies in particular, there is little to no incentive for borrowers to repay loans, as the amount holders have borrowed against their NFTs is higher than the current floor price, according to NFT analyst Wale.

Azuki, on the other hand, is a victim of BendDAO’s slow oracle updates, according to another analyst known as Stats, who noted, “After Azuki holders claimed their $ANIME, they could immediately go to BendDAO and borrow 5+ ETH against their NFT even though the floor was already down to 4.8 ETH or lower.”

In addition to the mispricing, BendDAO pools were also maxed out, resulting in interest rates spiking to 164% on ETH and 92% on USDT. BendDAO attempted to address the situation by using the DAO treasury to strategically bid on some Azuki assets and add new design mechanisms to avoid liquidation.

The proposed design upgrade plan will implement a new flagging system that halts new borrowing after major price fluctuations.

While the liquidation threat creates a flywheel of selling pressure, BendDAO has faced similar troubles in the past when the Bored Ape Yacht Club faced a potential liquidation cascade in 2022.

“The good news is that this is not the first Blend crisis, and it usually plays out without a total collapse. Especially with bluechip NFTs, there is usually always an incremental buyer at some level…So no real reason to panic, but another metric to be aware of when buying NFTs,” Wale added.

Despite the NFT lending market’s resilience to previous threats, some users are calling the effectiveness of protocols like BendDAO into question.

PunksOTC, the largest over-the-counter CryptoPunks trading desk, said, “At some point, the lagging oracle will kill the protocol; hopefully, this $ANIME airdrop is the beginning of the end, and people all migrate to more modern lending protocols.”

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