Liquidity crunch may loom for Bored Ape-collateralized loans as floor price slides

The floor price for Bored Ape Yacht Club non-fungible tokens, a leader among NFT collections, has fallen to an eight-month low, raising the risk that dozens of the NFTs used as collateral for decentralized lending service BendDAO may be forcibly sold.

That scenario could then trigger a cascade of further liquidations, said Anndy Lian, author of the new book NFT: From Zero to Hero, in an interview with Forkast.

BendDAO is a peer-to-peer platform that allows users to front NFTs as collateral for Ethereum loans for roughly 30% to 40% of the NFTs floor price — or the minimum price to purchase one of the Bored Ape Yacht Club NFTs on the open market. 

Currently, 121 of the 227 Bored Apes collateralized on BendDAO — 2.27% of the entire collection — are considered to be at risk of liquidation as the collection’s floor price nears the level at which the tokens are valued on the platform. 

“If that happens, that would be a major setback for all the NFTs that are on Ethereum,” said Lian.

With Bored Apes the second highest-selling NFT collection, Lian said a liquidation of this size would only put further downward pressure on the collection itself, others on the network, and even on the price of Ethereum itself. Combined with existing macro-economic pressure likely facing the crypto market this year, that could spell more grief for investors.

“That downstream issue [could] then create a really, really bad winter for everyone else next year,” he added.

Sick apes

BendDAO rates the risk level of a collateralized NFT via a so-called “health factor,” which is a ratio of the individual NFT’s value compared to the collection’s floor price. When that metric falls below 1, the token is automatically entered into a liquidity state for 48-hours to give the owner the chance to pay off the loan and interest to earn the token back or place it up for auction.

There are currently 21 Bored Ape Yacht Club NFTs with a BendDAO health factor of under 1.1 and a further 42 with a health rating under 1.2.

In response to the liquidation threat, BendDAO said Monday in a blog post they would be adjusting the liquidation threshold for these assets to 70% of the floor price by Sept. 20 over four stages with the first adjustment to 85% taking place on Aug. 30.

They also said they would be shortening the auction period to just 4 hours to improve liquidity for auctions.

“We are sorry that we underestimated how illiquid NFTs could be in a bear market when setting the initial parameters,” the BendDAO blog post read. “In the past several days, we got tons of feedback and suggestions from the community.” 

The floor price for the collection, typically known as BAYC, hit 65.68 Eth (US$104,693) on Saturday, the lowest since early January and a price that was exceeded briefly by the rival CryptoPunks NFT collection on Sunday evening. 

The BAYC collection’s current floor price of 68.48 Eth marks a 55% plunge from a high in early May of 153 Eth, which Lian attributes to two main factors.

Merge factor

“Number one is that the overall market is not in the best condition,” he said. “Number two is there are still people with doubts on Ethereum 2.0. This adds some anxiety to people who are holding onto NFTs and using it as a collateral.” 

Ethereum 2.0, usually referred to as “the Merge”, will involve the world’s second-largest blockchain mainnet transitioning from its current proof-of-work consensus mechanism to a proof-of-stake system. This change will make the network vastly more energy efficient, but will make Ether crypto miners effectively redundant, which has caused some miners to push back against the transition. 

While Ether has recently shown some signs of price recovery, it is still down 55% from the start of the year, a decline that is reflected in the NFT market which has failed to amass more than US$1 billion in monthly sales for the past three months. In March, April and May, sales breached US$2 billion or US$3 billion a month. 

“It is actually a big concern for a lot of NFT speculators because the chances of them selling their NFT or BAYC at a certain high price is not going to come anytime soon,” Lian said of the sluggish sales figures.  “This is worrying.”