Reports said that many owners of precious Bored Ape Yacht Club (BAYC) and CryptoPunks nonfungible tokens (NFTs), who used them as collateral to take out loans in Ether (ETH), have failed to repay their debts.
It has been reported that the situation could lead up to the NFT sector's first massive liquidation event. DoubleQ, the founder of Web3 launchpad Double Studio, says lending service BendDAO could liquidate up to $55 million worth of NFTs to recover its loans, fearing the so-called "health factor" of these debts could fall below 1.
However, an NFT collection's floor price is important in determining the health factor. BendDAO offers 30%–40% of the NFT's floor price as loans. But the protocol sells the NFT if its floor price falls too close to the amount borrowed, a liquidation threshold.
The report said that the floor price of BAYC has fallen from 153.7 ETH in May to 69.69 ETH in August, a nearly 55% plunge in three months. Simultaneously, the health factor of at least 20 loans with BAYC as collateral has fallen to 1.1 as of August 19.
Likewise, borrowers have 48 hours to repay the loan or their NFT collateral will be liquidated. According to doubleQ, these liquidations could lead to "a death spiral for the BAYC ecosystem and NFT market as a whole," given BendDAO's exposure to other NFT projects, including CryptoPunks and Doodles.
Naimish Sanghvi, the CEO of India-based crypto news outlet Coin Crunch, wonders if there would be any buyers due to a lack of arbitrage opportunities.
He said:
"Your bid has to be more than 95% of the floor value and higher than the debt amount. The auctions don’t begin until the first bid is placed, so there may be several NFTs in limbo at a given point in time if the prices are unfavorable. And that should scare the Liquidity providers."
Thus, this scenario would have BendDAO wait for borrowers to repay their loans—or to wait for the re-emergence of liquidators after a market recovery—to subside its "temporary floating loss."
Source: Cointelegraph