Data interpretation of the Azuki incident: Will the NFT lending platform go bankrupt?

Author: LD Capital

On June 27th, Azuki launched a new series of Elementals and took away 20,000 ETH from the NFT market; and because the quality of the drawing was seriously lower than expected and the team’s cash-out incident led to a double kill of funds and confidence in the entire NFT market, the price of blue-chip NFTs fell sharply . Since June 27, Azuki floor prices have fallen by about 47%, BAYC has fallen by 20%, MAYC has fallen by 18%, and Crypto Punks has fallen by 9%.

Blue Chip NFTs Slump After Aziki Incident

Data source: NFEX, LD Capital

In the DeFi lending market, the market black swan event leads to such a sharp drop in collateral in a short period of time, which will trigger the passive liquidation of the lending agreement, resulting in a series of stampedes that make the market more extreme; however, due to the poor liquidity of NFT, the lending market usually The collateral will be liquidated by auction, and the liquidation time will last for several days. In this way, if there is an extreme market situation, the NFT lending agreement may have a large number of bad debts, and these bad debts need to be paid by the agreement or depositors. (In historical observation, every time the price of NFT falls to the centralized liquidation range of the lending agreement, it will form a price support. The reason is that the lending agreement in this price range bears the risk of bad debts and absorbs a large number of selling orders, and there is currently a lack of short-selling NFT lending agreements. Therefore, the price of NFT in this price range will often form a strong support).

In the sharp decline of blue-chip NFTs this time, Blend is not the main discussion object because it is a peer-to-peer lending product, and the agreement does not bear the risk of bad debts. This article will focus on the three peer-to-pool lending products of BendDAO, Jpegd and ParaSpace.

1. BendDAO

On July 3, following the sharp drop in Azuki, the BAYC series of NFTs also fell sharply. There were 267 ETH debts in the auction on the BendDAO platform, of which 22 ETHs were bad debts (bad debts mean that the collateral value is less than the corresponding debt; this is the first time that the BendDAO platform has had bad debts).

The team initiated a proposal to use treasury funds to liquidate bad debts on the platform; at that time, there were 45 ETH, 326,800 USDT, 13,500 APE, and 2.372 billion BEND in the BendDAO treasury. Excluding BEND, other assets were equivalent to 190 ETHs; Ability to deal with platform bad debts and loans under auction. But at the same time, BendDAO’s pending loan balance reached about 900 ETH. At the same time, the price fed by BendDAO’s oracle machine was slightly higher than the floor price of the trading platform due to the time-weighted average problem, and it was even higher than the buyer’s pricing in the market (bid price ), the risk of platform bankruptcy has increased, and the deposit pool has shrunk significantly.

Loans hit record high for auction on July 3

Data source: Dune, LD Capital

After July 3rd, due to the slight rebound in the price of blue-chip NFTs, most of the loans in BendDAO completed the auction. At present, the bad debt on the BendDAO platform is 12.81 ETH, and the auction debt is 72.48 ETH. The team’s proposal to liquidate the platform’s bad debt with treasury funds was passed, and the crisis of BendDAO’s bankruptcy was eliminated.

When the collateral prices of BendDAO and Paraspace fell sharply, the logical chain and subsequent deduction of related events are as follows:

The price of collateral has dropped sharply ➡ A large number of collaterals have been liquidated ➡ The risk of bad debts on the platform has increased ➡ The deposit pool has shrunk ➡ The passive increase in deposit and lending rates ➡ Users repay and get back collateral (or market confidence restores deposit growth).

At present, the BendDAO deposit pool has dropped from about 45,000 ETH before the Azuki incident to about 6,000 ETH at present, TVL has been cut in half, the deposit rate has risen from 5% to 48%, and the borrowing rate has risen to 62%.

BendDAO’s TVL drops 54% after NFT price crash

Two, Paraspace

The situation of Paraspace is roughly similar to that of BendDAO, but because a large number of loans in Paraspace exist in the form of USDT instead of ETH, in the past six months, the exchange rate of blue-chip NFT to USDT has dropped less than that of ETH (ETH price has increased), resulting in The overall LTV of the Paraspace platform was lower than that of BendDAO before the incident, so it was less affected by the impact of this incident.

Paraspace’s TVL drops 23% after NFT price crash

Data source: defillama, LD Capital

Three, Jpegd

Since the main collateral in Jpegd is CryptoPunk (the price drop is small), and Jpegd borrows in the form of minting pETH and pUSD through CDP, the agreement does not have a deposit pool, so there will be no sharp rise in interest rates after the deposit pool shrinks, so Jpegd basically Not affected by this incident.

It should be noted that Jpegd may modify the economic model to launch the pETH function of mortgaging JPEG tokens; currently Jpegd has two Guage pools in Curve, namely pETH/ETH (TVL 21.27m, APY 22.38%) and Jpeg/ETH (TVL 4.22m, APY 55.64%), due to the lack of demand for NFT mortgage loans, pETH has a long-term positive premium; the Jpegd protocol launches the JPEG mortgage casting pETH function, which can release JPEG’s loan liquidity, alleviate the positive premium of pETH, and at the same time expand the protocol’s Crv governance resources. The degree of sharing is shared with JPEG holders (JPEG mortgage minting pETH and ETH group LP mining does not need to worry about the risk of impermanent loss).

Jpegd’s TVL drops 9% after NFT price crash

Data source: defillama, LD Capital