NFT lending also has a death spiral? Can blue chip floors hold up? – Block D Weekly | Uncle D

What is NFT lending?

Last month I wrote aIf you can’t sell it, what can you use it for? 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.

Usually only well-known projects are accepted by lending platforms

NFT lending also has a death spiral?

A few months back, at the time of the LUNA incident, I also wrote an article “Collapsing Stablecoins: The Death Spiral Dance of UST and LUNA“Introduces how UST’s stabilization mechanism causes an almost irreversible death spiral when market sentiment collapses. Unexpectedly, there seems to be a death spiral in the field of NFT lending recently, which is also caused by the collapse of market sentiment towards prices. death spiral.

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%

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.

Bear market NFT prices dropLead 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, and in the past few days, it has been reported that a large number of blue-chip NFTs (the borrower’s collateral) 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, as liquidations and bad debts continue to increase, there is a situation where lenders (people who lend money to others) may not get their ETH back (latestinformationIt is that BendDAO currently only has 15ETH left to repay the lender), so the funds in the BendDAO protocol have fled (the lender who originally put the money here dared not let it go, so he took the money).

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, please refer to“Block D Weekly” subscription area to leave Email subscriptionyou can receive news worth paying attention to in the mailbox every week!