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Bored Ape and CryptoPunks Loan Collateral to Trigger Forced Sales and Price Collapse?

Bored Ape Price decline
Bored Ape Price decline

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Bored Ape Yacht Club (BAYC) and CryptoPunks have been the two most valuable NFT collections since the beginning. So much so that they were sold for hundreds of thousands of dollars, if not for millions.

But, as it seems, the good days for these high-end NFTs are approaching their end. This is particularly because of their price collapse and also because 2.7% of these tokens might be sold forcibly over BendDao (an ETH lending platform).

The situation has worsened due to the bear run of the overall crypto market. ETH (a key determinant of the prices of these NFTs) has been plummeting ever since November 2021.

With a total of 20,000 assets and 10,000 unique owners between them, Bored Ape and CryptoPunks account for a large chunk of the NFT market. This makes it even more important to dive deeper into the problem and make ourselves aware of the factors responsible for the same.

What is BendDao?

BendDao is a DeFi protocol that enables its users to borrow ETH pooled in by the depositors in exchange for NFTs. The borrowers can use NFTs on this platform as collateral for their loans.

The depositors are generally allowed interest on the ETH deposited by them, which otherwise would have been sitting idle in their wallets. High-interest rates due to the absence of third parties incentivize the depositors and make the platform more liquid.

BendDao only accepts ETH as deposits. So the people looking to deposit in this pool must first exchange their respective currencies in ETH.

Borrowers are only allowed a percentage (30-40) of the floor price of the NFT that they have deposited with the platform. So the higher the floor value of the NFT, the higher the amount that could be borrowed.

Why are CryotoPunk and Bored Ape NFTs Being Sold Forcibly?

Lately, BendDao has been facing issues with its borrowers, who haven’t repaid the borrowed amount back to the platform. This has triggered a warning among the depositors, leaving the platform with negligible funds in the pool.

Now to counter an even bigger disaster, the platform has announced the liquidation of NFT assets which were used as collateral against the unpaid borrowings.

What this means is that NFTs would be auctioned individually to pay back the depositor’s money.

The team has announced certain measures to keep the platform up and running and gain back the trust of its depositors. The owners of the NFTs are given a 48-hour liquidation-protection period is to pay the borrowed money and save their NFTs from being auctioned. This protection period will now be reduced to 4 hours to fasten the whole process.

Bids usually start at 95% of the value of the asset but are now proposed to be at 85% and be further reduced to 70% by September 20. This will incentivize bidders to invest in otherwise falling CryptoPunks and Bored Ape NFTs. It also acts as a penalty for the borrowers who failed to repay the sorrowed sum from the platform and caused this problem in the first place.

The borrowers also need to pay increased interest (as much as 100%) to the lenders.

Shortage of ETH

As already mentioned, BendDao operates on ETH, and as the borrowers have started to default on their loans, the platform has been witnessing a crunch on its ETH pool.

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This can be easily figured out by the fact that they are required to pay several times more ETH to the depositors than they currently have on the platform. The cumulative lent amount is somewhere around 15,000 ETH, whereas the platform only has 425 ETH.

Low Floor Price and Forced Sales

The troublesome situation of BendDao could only be solved by the sale of the NFTs deposited with them as collateral. With the NFTs already trading lower than their usual value, this would mean a setback for a lot of investors. Holders now may be required to sell their NFTs at a loss.

With as many as 216 Bored Ape NFTs tied to various BendDao loans, one of the Biggest NFT collections on the internet, it will definitely have a huge impact on the rest of the NFT industry.

CryptoPunks, currently sailing at a floor price of 66.45 ETH, has a total of 24 NFTs that are currently tied to a BendDao loan. With the value of ETH already plummeting, the forced sale of these assets may result in huge losses.

Dozens of these NFTs have already been flagged because their floor price decreased beyond a certain level

A Suitable Alternative to Bored Ape?

The forced sale of these assets compounded with their ever-decreasing valuations may impact the future investment decisions for many. BendDao’s is a typical case of a banking disaster. NFTs such as Bored Ape and CryptoPunks, which have been regarded as the most valuable NFT collections, were unable to escape its impact.

This is particularly because these NFTs weren’t linked to a project where from it could derive its value and be stable even in a bear market. This is why, the NFTs that boast a sound project could be a better alternative to them.

Crypto projects like Lucky Block (listed as LBLOCK), Tamadoge (listed as TAMA), and Battle Infinity (listed as IBAT) are a few examples of the same. One important thing they all have in common is a well-laid-out roadmap.

The NFTs created on these platforms derive their value from their in-house tokens, which in turn derive value from the overall development of the project.

These projects have been able to raise millions of dollars in presales and initial listings. Being relatively new projects, they are also easier to invest in than the well-established NFT collections.

In other words, success of these projects would increase the value of their currency which in turn would increase the value of the NFTs bought using those tokens.

Conclusion

Bored Ape and CryptoPunk NFTs used as collateral in BendDao face the risk of liquidation. This could only be avoided if the borrowers repay their loans within the protection period.

The proposal that has been suggested by the team regarding the liquidation parameters has been agreed upon by 99% of the BendDao members. This step has been taken to incentivize the investors to maintain their faith in the platform, which has reached a near insolvency stage.

This has also brought to the surface the risks of investing in NFT that are not backed by a strong project.

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