BendDAO is insolvent, is NFT finally ushering in the subprime mortgage crisis?

  Written by: 0xLaughing, Rhythm BlockBeats  

NFT weekly trading volume hits record New lows (Source: Nansen)

Recently, the NFT market has continued to slump, and the trading volume has continued to fall New low, according to report, NFT weekly trading volume (August 9-15) reached 76,637 ETH, a record low , has been below 153,000 ETH for 13 consecutive weeks.

At the same time, the decline in trading volume is also accompanied by the decline in NFT prices, and the floor price of BAYC From the all-time high of 153.5 ETH to less than 70 ETH, a drop of more than 54%. The drop in the floor price triggered the liquidation auction mechanism of BendDAO, an NFT mortgage lending platform. On August 18, BAYC was first liquidated and auctioned on BendDAO, and the continued decline in the floor price in the following days triggered more BAYC to be liquidated.

At the same time, a large amount of funds that originally provided liquidity for the ETH loan pool in BendDAO also quickly withdrew, and the In just four days, the balance of ETH in the ETH lending pool dropped from more than 16,000 pieces to a minimum of 0.58 pieces, which was almost withdrawn.

NFT lending leader BendDAO is in a deep liquidity crisis, and BAYC, which has always dominated the NFT market, has been liquidated , "The NFT market is about to start a death spiral", "NFT's subprime mortgage crisis is coming" and other remarks are rampant, and panic spreads rapidly for a while.

How did this liquidity crisis of BendDAO happen?

Before, Rhythm BlockBeats was in "Get 2 airdrops with 1 BAYC? Detailed Explanation of "NFT Bank" BendDAO" explained BendDAO's business logic, Token economic model, features and advantages, and potential problems in detail. This section only introduces the core business related to this incident.

What is BendDAO?

BendDAO's mortgage lending business

BendDAO is the first Decentralized point-to-pool NFT liquidity agreement, mortgage lending is the core business of BendDAO.

Through BendDAO, lenders can provide ETH liquidity to the lending pool to earn interest and borrow People can use NFT as collateral to instantly borrow ETH in the lending pool.

How does BendDAO's liquidation auction mechanism work?

BendDAO liquidation, redemption, auction process

Bend agreement Use the "Health Factor" to evaluate the current lending situation. The "Health Factor" is a digital representation of the security of the mortgaged NFT relative to the loaned ETH and its basic value. The higher the value, the status of the funds The safer it is, it can resist liquidation risks. Its calculation formula is:

health factor= (floor price * liquidation threshold) / debt with interest

The floor price of NFT assets as collateral As a result, the health factor of its corresponding loan is lower than 1, anyone can trigger the liquidation of the NFT auction, and the 48-hour forced liquidation protection and the auction of NFT collateral will start at the same time (Note: the current calculation formula above is for each NFT project The liquidation threshold is 90%).

At the same time, the Bend protocol uses The NFT floor price of >OpenSea and LooksRare is used as the price feed data of NFT collateral, and the time-weighted average price of the floor price will be calculated at the same time (Time Weighted Average Price, TWAP) to avoid the impact of short-term sharp fluctuations in NFT prices in the NFT market, so as to ensure the accuracy of the floor price.

How did BAYC trigger BendDAO's liquidation auction?

The floor price of BAYC fell, causing BAYC#533 to become the first BAYC to be liquidated and auctioned on BendDAO

On August 18, the floor price of BAYC fell to around 72 ETH, while the interest-bearing debt of BAYC#533, which had previously mortgaged on BendDAO, was 66.97 ETH.

The health factor for calculating this loan at this time is (72*90%)/66.97 = 0.97, less than 1, which triggered BendDAO's liquidation auction mechanism, and BAYC#533 became the first BAYC to be liquidated and auctioned on BendDAO.

According to report, at that time, there were 20 BAYCs on the BendDAO platform with a health factor less than 1.1, and a total of 40 BAYCs with a health factor less than or equal to 1.1. According to the liquidation auction mechanism of the BendDAO platform, when the health factor is less than 1, the NFT liquidation auction will be launched, which means that these BAYCs are on the verge of being liquidated and auctioned.

How is BendDAO’s lending pool emptied?

The process of BendDAO forming a large number of bad debts

Conceived according to the Bend agreement Under normal circumstances, there are only two "optimistic" processes after the liquidation auction is triggered:

1. Ideal process: the borrower repays within 48 hours Loan, interest and pay fines, and then redeem its NFT; the borrower did not repay the redemption, and finally the highest bidder in the auction will repay the debt and obtain this NFT.

2. The process under unfavorable circumstances: Due to the short-term price fluctuations, the borrower has not repaid the redemption in the short term and no one participates in the auction, then only Waiting, either waiting for future borrowers to repay and redeem, or waiting for a liquidator to participate in the auction after the market price rises in the future.

BendDAO's loan pool balance (source: Dune)

The current situation is:

Due to the NFT market In the cold, the floor price of NFT continues to fall, which may lead to more NFT liquidation auctions in the future. Lenders who lack confidence in the market or panic choose to withdraw a large amount of ETH liquidity from BendDAO's lending pool. According to < a href="https://dune.com/cgq0123/Bend-DAO">Dune data, in just four days, more than 160 million ETH in the ETH lending pool were almost withdrawn. There are only 0.58 ETH in the pool.

BAYC#533's debt is higher than its floor price, and its liquidation auction has no bids so far

At the same time, the floor price of many NFTs has quickly fallen below its debt price, which is restricted by the auction rules (the bid must be higher than 95% of the floor price and must be higher than the debt price), Most of the NFTs in the liquidation auction were either unable to bid or unprofitable, and the liquidators who lost the motivation for arbitrage chose to wait and see, which resulted in a large number of NFTs that no one participated in the auction, which further exacerbated the flow Sexual squeeze.

Cause Analysis

To some extent, this liquidity crisis is a "natural and man-made disaster" jointly caused by the NFT market and BendDAO.

First of all, the bad environment of the entire NFT market is an important reason. The NFT market has been cold, and trading volume and prices have continued to fall. This has caused a large number of NFTs that have achieved large loans at extremely high floor prices to almost simultaneously touch the liquidation price line. At the same time, NFT investors lack confidence in the market outlook, and loans A large number of people withdraw from the liquidity of the lending pool, causing a run.

BendDAO's liquidation mechanism shows optimism for blue-chip NFT

Problems with liquidation auction mechanism

The problem of the entire liquidation auction mechanism is that the bid limit does not consider extreme situations, the health factor has insufficient warnings, and the auction liquidation time is too long caused by many factors.

Auction bid limits do not take extreme cases into account
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According to Liquidation FAQ, there are three conditions for NFT bids in liquidation auctions:

1. Must Above 95% of the floor price

2. Must be higher than the total accumulated debt

3. Must be higher than the previous auction bid by more than 1% of the debt

And this auction mechanism has a big problem in the current extreme situation, the floor price quickly fell below the debt amount, if As mentioned earlier, the inability to bid or the unprofitability resulted in a large number of NFTs that no one participated in the auction.

Insufficient health factor warning and too long auction liquidation time

In the previous article, the original 90% liquidation threshold is used to calculate the 100 E floor In the case of BAYC for mortgage loans, there is only a difference of 4E from the floor price of 44E that triggers liquidation to the debt amount that falls below 40E.

During the 48-hour liquidation auction, if a floor Price <debt amount + fine In this case, the borrower is very likely to lose the incentive to repay.

Will this cause a death spiral/cascade of liquidations across the NFT market?

In the short term, it will not trigger a death spiral

In DeFi, it is often caused by bad news that the prices of mainstream digital assets such as Bitcoin and Ethereum have fallen, which has led to a decline in some DeFi ecosystems. The mortgage assets are insolvent and liquidated. The liquidation and sell-off process triggered a further decline in mainstream digital assets, which also caused more assets to be liquidated due to insolvency. This reciprocation caused the price of digital assets to enter a "death spiral."

The NFT market is quite different from the DeFi market.

NFT participating in BendDAO lending accounts for a very small proportion in its corresponding NFT series

First of all,  In this event, the loss of BendDAO's bad debts is borne by those lenders who cannot take out the ETH liquidity in the lending pool, and the volume of this part of the lending is relatively small compared to the NFT collection involved and the entire NFT market.

Secondly, the NFT currently being auctioned and liquidated is not sold on NFT trading platforms such as OpenSea. In other words, it will not lower the floor price of the secondary market, and then re-feed the price to BendDAO's oracle machine, causing the mortgaged NFT inside the platform to be further liquidated.

In the long run, it may have an impact on the market outlook

Because there are currently a large number of blue-chip NFTs in the state of liquidation and auction in BendDAO, and the NFT market is in a cold winter, there may not be enough funds and Liquidity to absorb all liquidations. If no one redeems or auctions,  BendDAO may form a pending order wall similar to NFT trading platforms such as OpenSea in the long run, which reduces the liquidity of other NFT trading platforms and may cause A further drop in floor prices.

Conclusion

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BendDAO was officially launched in April this year, during the bull market of NFT, and later firmly took the top spot in the NFT lending market. Born in a bull market, it is too optimistic about the NFT market, fails to be prepared for danger in times of peace, and does not consider extreme market conditions enough, which is an important reason for this liquidity crisis.

The founder of BendDAO said that there were only 278ETH of bad debts at the beginning, but this caused subsequent runs

“Confidence is more important than gold.” The poor performance of the NFT market caused the floor price to fall, which led to a lack of confidence among NFT traders; a small amount of bad debt problems at the beginning of the crisis were not resolved in time , which caused the panic stampede of the liquidity providers of the lending pool. This is the objective reason for this incident.

Fortunately, after the accident happened, BendDAO’s official response was relatively timely and quickly launched a < a href="https://governance.benddao.xyz/t/bip-9-adjusting-liquidation-threshold-auction-period-and-interest-base-rate-ui-improvement/114">BIP#9 Proposal< /a>, adjustments will be made to the liquidation threshold, auction cycle, bidding limit, base interest rate, etc., and improvements will be made to the display pages in the UI interface that may cause misunderstanding and panic.