NFT lending also has a death spiral? Can blue chip floors hold up? - Block D Weekly Report

What is NFT lending?

Last month, I wrote an article titled " Why Can You Use It If You Can't Sell It?" Three ways to keep your NFT from becoming a useless JPG in your wallet ", the third way is NFT lending. To put it simply, it is to take the NFT in your hand as a mortgage and lend the funds to use. The advantage is that you can obtain funds without actually selling the NFT, which improves the shortcomings of NFT’s poor liquidity. The disadvantage is that you must pay interest and bear the possible losses of NFT price fluctuations. However, currently not any NFT can be used for mortgage lending, and only well-known projects will be accepted by the lending platform. At present, the well-known NFT mortgage lending platforms include BendDAO, NFTfi, and Drops.

NFT lending also has a death spiral?

A few months ago, at the time of the LUNA incident, I also wrote an article "The Collapsing Stablecoin: The Dance of the Death Spiral of UST and LUNA " to introduce how the UST's calculation stability mechanism caused almost irreversible effects when market sentiment collapsed. The reversal of the death spiral, I did not expect that there seems to be a death spiral in the field of NFT lending recently. It is also a death spiral that is further triggered when the market's price sentiment collapses.

BendDAO Lending Mechanism

The protagonist this time is the well-known BendDAO. Simply put, its mechanism is:

1. People who want to borrow money throw NFTs into BendDAO's pool to stake
2. Loan ETH of "30%~40% of the floor price of the project at that time" (these ETHs come from people who want to lend to earn interest)
3. The interest rate is about 15%~25%

Original push link: here

But the price of NFT is floating. If the price of NFT goes to zero, won't it become a worthless collateral? Therefore, BendDAO designed a "health index" to calculate the index at any time. If it is lower than 1, it will automatically start the 48-hour liquidation process and auction the NFT. Anyone who has entered the liquidation auction process can buy NFTs.

Falling NFT prices in bear market lead to serial liquidations, triggering a death spiral crisis

Previous articles have emphasized that NFT lending is not recommended for novice users, please evaluate carefully. As a result, it has only been more than a month. In the past few days, it has been reported that a large number of blue-chip NFTs (collaterals of borrowers) on BendDAO will be liquidated due to the recent bear market price drop.

Since the transaction price of the liquidation auction can be lower than the floor price at that time, the floor price will be lowered a little more each time it is liquidated, which will trigger more NFTs to enter the liquidation process. The situation seems to be about to turn into an unsolvable death spiral.

The spiral suddenly pauses (but it's not a good thing)

But the embarrassment is that despite the large number of blue-chip NFTs being auctioned at a special price, no one wants to be the liquidator (buy it).

In view of the current sluggish NFT market conditions, the market expects that the price will only get lower and lower, and because BendDAO's bidding mechanism is not good for liquidators in this situation (there is a minimum price limit and ETH needs to be locked for a period of time after bidding), causing everyone to worry It started to lose money as soon as the bid was made, so there were no bids. Without bids, there will not always be deals below the floor price, thus at least stopping the downward spiral in BendDAO a little (but still not stopping the overall market from affecting the floor price).

On the other hand, due to the continuous increase of liquidation and bad debts, the lenders (people who lend money to others) may not be able to get ETH back (the latest news is that BendDAO currently only has 15 ETH left to pay back to the lender), so the BendDAO protocol is also allowed. The funds in the store have fled (the lender who originally put the money here was afraid to release it, so he took the money away).

Is it a blue chip crash or an entry signal?

Although some people continue to bet that NFTs will fall all the way, there are also voices of "taking the opportunity to buy blue chips at special prices". Although individuals are optimistic about NFT collections and applications for a long time, it is still recommended to observe the market direction before taking action in the short term, at least after this series of firework shows of NFT lending protocols. As the old saying goes, DYOR, please evaluate carefully if you have any investment behavior.

The above is the content of this week's "Block D Weekly Report". If you are also curious about what impact the blockchain will have on the world in the future , leave an email subscription in the "Block D Weekly Newsletter" subscription area , and you can subscribe every week. Receive interesting news in the mailbox!