A large number of Bored Apes Yacht Club NFTs are approaching liquidation on the lending platform BendDAO, can this cascade into a crash of the entire non-fungible token market?
BendDAO is a platform that lends out Ethereum loans to users against NFT collaterals. Generally, users can avail up to 30-40% of the floor price of the non-fungible token they are putting up on the platform.
However, if the floor price of the digital collectible in question drops to a certain level, the platform forcibly puts the token up for auction.
This liquidation level is determined by the “health factor” of the NFT-backed loan. When the value of this metric drops below 1, the token automatically enters into a 48-hour liquidation protection state where the owner can choose to pay off the debt and reclaim the token.
If the user fails to clear the loan, the non-fungible token is auctioned away, and the highest bidder gets to claim it.
Now, what’s going on with Bored Apes is that many BAYC holders have borrowed ETH using the BendDAO lending service, and a significant number of these users are at a risk of liquidation currently as the floor prices of the collection has been going down in recent weeks.
An analyst on Twitter has suggested that a possible consequence of these BAYC liquidations can be a crash of the entire NFT market.
When these Bored Apes loans with health factor values close to 1 start going under, the resulting liquidations will drive the floor prices even lower. This would mean more BAYC-backed debts will be pulled down into liquidation.