Blockworks Research analyzed the reasons why BendDAO affected the decline in BAYC floor prices on social media, and pointed out that there may be problems with the cascading liquidation mechanism designed by BendDAO, that is, when the value of loan collateral declines and approaches the borrowed value, such as through liquidation The threshold will auction the collateral. When a certain collateral is liquidated, it will trigger another loan to reach the liquidation threshold, resulting in a domino effect, which will eventually lead to a sharp drop in the price of the mortgage object.
In the BendDAO mechanism, as long as the borrowed asset price is lower than 90% of the floor price, the mortgaged NFT will be auctioned (35,000 ETH of blue-chip NFT on BendDAO is mortgaged).
In the last three days, 28 BAYC and 28 MAYC have been liquidated, and now 3 BAYC and 12 MAYC are being auctioned. This transaction triggered by cascading liquidation has caused the BAYC floor price to fall, and MAYC has seen a similar situation.
If the cascading liquidation pushes the floor price down by another 20%, then the NFTs mortgaged by it will be liquidated. It should be noted that BendDAO stipulates that the bid in the liquidation auction must be at least 95% of the reserve price. Although this helps to curb the risk of death spiral, it will cause depositors to fall into the value of NFT (bad debt), which means that as an NFT holding Someone doesn’t have ETH to borrow, so there’s a run because no one wants to get into debt that isn’t fully backed.
BendDAO is currently implementing a governance proposal to reduce auction times and lower the threshold for liquidation, and while the proposal may give depositors some confidence in over-collateralization, it may lead to more NFTs being liquidated hastily.