Will the NFT bubble burst?

BendDAO, a NFT lending protocol, has been facing liquidity crisis due to the declining crypto market
Will the NFT bubble burst?
Will the NFT bubble burst?
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According to analytics firm Dune, more than 1 million non fungible tokens (NFTs) are being sold every month. To many, NFTs are just a mere internet phenomenon. But not to international firms like Nike, Adidas, Budweiser etc. Nike alone made $185 million through NFT sales on the Ethereum (ETH) blockchain. While making money through selling NFTs is the most popular activity, there are other ways to put your NFTs to work. And this is where BendDAO came into the picture. In today’s article, we will briefly look into what BendDAO offers and why it ran into a liquidity crisis. 

What’s BendDAO?

Decentralized Autonomous Organization (DAO) is a protocol enforced by computer code (rather than by people) collectively owned by the members of that organization. DAO can be thought of as a safe and effective way to collaborate with internet strangers. 

BendDAO is the first decentralized NFT liquidity protocol. NFT holders are able to borrow ETH through the lending pool using NFTs as collateral instantly, while depositors provide ETH liquidity to earn interest. The leveraged NFT trading is built on instant NFT-backed loans. 

For example, if a user deposits a BAYC worth 100 ETH floor as collateral, he/she will receive 30-40 ETH in return as a loan. Many people deposit their bluechip NFTs such as BAYCs, MAYCs etc on BendDAO, to receive more ETH, with which they buy more NFTs. they also provided upto 11% APR for depositing Ethereum & interestingly they also provided a 27% APR to "borrow" ETH

That’s great, but what happened?

Two months back, NFT sales declined by over 75% to yearly lows in tandem with global crypto market lows. This means, the value of NFTs that people deposited as collateral on BendDAO to borrow more ETH also fell, coming closer to liquidation price. A further price drop could lead to forced liquidations of bluechip NFTs. 

There are currently 32,267 ETH worth of NFTs valued at around $59 million being used as collateral for loans on BendDAO. With the fall in value of NFTs in the bear market, the health factor of the loans has reduced considerably. Health factor is similar to Margin requirements in futures trading. 

A health factor lower than 1 triggers a liquidation event within 48 hours. A health factor below 1.2 is a warning sign. There are over 45 BAYCs with a health factor lesser than 1.2. In a liquidation event, the borrower will get only 48 hrs to repay the loan he has taken on his NFTs, or risk his NFTs being auctioned off to the highest bidder. 

Lack of liquidity around bluechip NFT projects could lead to a lack of exit liquidity for users, leading to a domino effect. If users get liquidated, NFTs could be auctioned off at dirt cheap rates. Whether this will provide a buying opportunity or lead to a burst of the so-called NFT bubble, only time can answer. 

Use promocode TNM51 at www.giottus.com/profile#promo after registration to get Rs.51 worth free Bitcoin.

Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.

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