Original author:0xLaughing, Rhythm BlockBeats

Original author:

image descriptionto reportNFT weekly trading volume hits record low (Source: Nansen)

Recently, the NFT market has continued to slump, and the trading volume has continued to fall and hit new lows. According to

to report

At the same time, the decline in trading volume was also accompanied by a decline in NFT prices. The floor price of BAYC fell from a historical high of 153.5 ETH to less than 70 ETH, a drop of more than 54%. The drop in 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 floor price continued to fall in the following days, triggering more BAYC to be liquidated.

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the balance of ETH in the ETH lending pool dropped from more than 16,000 to a minimum of only 0.58, which was almost withdrawn.

first level titleUse 1 BAYC to claim 2 airdrops? Detailed explanation of "NFT bank" BendDAOPreviously, Rhythm BlockBeats had been in "

"In the article, BendDAO's business logic, Token economic model, features and advantages, potential problems, etc. are explained in detail. This section only introduces the core business related to this incident.

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What is BendDAO?

BendDAO's mortgage lending business

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

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How does BendDAO's liquidation auction mechanism work?

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BendDAO's liquidation, redemption, auction process

Health factor = (floor price * liquidation threshold) / debt with interestOpenSeaandLooksRareAt the same time, the Bend protocol uses the

The NFT floor price is used as the price feed data of NFT collateral, and the time-weighted average price (Time Weighted Average Price, TWAP) of the floor price will be calculated to avoid the impact of short-term violent fluctuations in NFT prices in the NFT market. To ensure the accuracy of the floor price.

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How did BAYC trigger BendDAO's liquidation auction?

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.

according toto reportaccording to

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.

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How is BendDAO's lending pool emptied?

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According to the normal situation envisaged by the Bend agreement, there are only two "optimistic" processes after the liquidation auction is triggered:

1. The process in an ideal situation: the borrower repays the loan, interest and pays the penalty within 48 hours, and then redeems its NFT; the borrower fails to repay the redemption, and finally the highest bidder in the auction will repay the debt And get this NFT.Dune）

2. Process in an unfavorable situation: 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, so you only need to wait, either waiting for the future borrower to repay the redemption, or waiting for the future market After the price rebounded, liquidators participated in the auction.

BendDAO's loan pool balance (source:Dune dataDue to the coldness of the NFT market, 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

Dune data

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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. Restricted by auction rules (requiring bids to be 95% higher than the floor price and higher than the debt price), most of the NFTs in liquidation auctions are either unable to bid Either it is unprofitable, and liquidators who have lost their arbitrage motivation choose to wait and see, which leads to a large number of NFTs not participating in the auction, which further exacerbates this liquidity run.first level title

Analysis of the cause of the accidentThis liquidity crisis is a "natural and man-made disaster" jointly caused by the NFT market and BendDAO.

First of all, the poor environment of the entire NFT market is an important reason.

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BendDAO’s liquidation mechanism shows optimism for blue-chip NFTs

Secondly, BendDAO was too optimistic about the market, and multiple mechanisms did not consider extreme market conditions, and failed to prevent/reduce the accumulation of bad debts in time when the run was just beginning to appear.

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Problems with liquidation auction mechanismThe problem of the entire liquidation auction mechanism is caused by many factors such as the failure to consider extreme situations in the bid limit, insufficient warning of health factors, and excessively long auction liquidation time.Bid limits for auctions do not take edge cases into account

According to BendDAO official documentation

Clearing FAQ

As explained in , there are three conditions for bidding on NFTs in liquidation auctions:

1. Must be higher than 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 amount

However, this auction mechanism has a big problem in the current extreme situation. The floor price quickly fell below the debt amount. As mentioned above, the inability to bid or the unprofitability resulted in a large number of NFTs that no one participated in the auction.Insufficient early warning of health factors and excessive auction liquidation timeDuring the 48-hour liquidation auction, if there is

In this case, the borrower is likely to lose the incentive to repay.

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Will this lead to a death spiral/cascading liquidation 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, resulting in the insolvency of mortgage assets in some DeFi ecosystems being 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.image descriptionThe NFT participating in BendDAO lending accounts for a very small proportion in its corresponding NFT series

first,The loss of BendDAO’s bad debts in this event is borne by those lenders who cannot take out the ETH liquidity in the lending poolSecondly, the NFTs currently being auctioned and liquidated are not sold on NFT trading platforms such as OpenSea, that is,

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.secondary titleBendDAO may form an order wall similar to NFT trading platforms such as OpenSea

epilogue

, reducing the liquidity of other NFT trading platforms, which may cause a further drop in the floor price.

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epilogueBendDAO 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 the 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 the lack of confidence of NFT traders; the small amount of bad debts at the beginning of the crisis were not resolved in time, which caused the panic and stampede of the liquidity providers of the lending pool. This is the objective reason for this incident.

Fortunately, after the accident, BendDAO’s official response was relatively timely and quickly launched a