News hardware The NFT industry in panic, here’s why
While the NFT market has suffered an overall drop in value following the fall in cryptos, the sector is not at the end of its surprises. A little-known protocol could send NFTs into a final bearish spiral.
NFTs: a sector in decline
As you know, non-fungible tokens have invaded the Internet for over a year. These art collections authenticated by virtual certificates on the blockchain have experienced an explosion in value. Image of monkey with Bored Ape Yacht Club or even pixelated punk with Cryptopunks, these avatars have been the subject of an unprecedented speculative bubble.
However, the madness was short-lived as the fall of Bitcoin this year called everyone to order, whether it was altcoins or NFTs. Extremely correlated to cryptocurrencies, the price of many collections, including the most popular ones, has dropped significantly.
As an example, the star-favorite Bored Ape Yacht Club (BAYC) collection has seen a significant drop in price. Going from €400,000 or 155 eth to around 127,000 (75eth) today, the price of the cheapest Bored Ape suffered a double blow: the fall in market prices as well as the fall of Ethereum. Nevertheless, it is important to remember that the majority of investors in the first days and months are still in theory gain since initially the price of a Bored Ape was trading around 0.16eth.
The selling pressure was obviously felt on the purchase and resale platforms. Since the beginning of the year, Opensea and the others have faced a constant drop in trading volume. This drop in enthusiasm has notably resulted in massive layoffs in the sector.
While we thought that the worst was over for NFTs, the sector could be the victim of a new turnaround…
The protocol that threatens the NFT market
For the past few days, the decentralized platform BendDAO has been on the lips of all players in the NFT market. The lending protocol makes it possible to obtain loans in cryptocurrencies, through the locking of its NFTs on the platform.
These lending platforms are very widespread in the crypto sector. The concept is simple: a borrower deposits his assets as collateral to obtain a loan in stablecoins (stable cryptocurrency) or Fiat currency (dollars, euros, etc.). The lender on the other hand deposits his stablecoins or his Fiat currency to obtain income with a variable rate. Only, in the case of BendDAO, the borrower can use his digital works in NFT as collateral to obtain his loan.
With the explosion in value of collections like Bored Ape Yacht Club or Cryptopunks, many have been able to take out this kind of loan. There are no less than 59 million dollars in NFT deposited on the platform.
However, as the market is no longer as favorable as it was then, a clause protecting the platform from non-refunds could have serious repercussions.
Indeed, if the price of the NFT as collateral falls below a certain cap – established by the platform according to the loan granted – then the protocol automatically sells the non-fungible token in order to recover liquidity. When the liquidation is triggered, the user has 48 hours to repay his loan and thus cancel the sale of the NFT as collateral.
An NFT liquidation cascade in sight?
You see it coming, the platform is paying a heavy price for the price drop of the entire NFT industry. The past few weeks have not been great for the non-fungible token market, as some NFTs have triggered liquidation, giving borrowers 48 hours to repay their loan.
The non-fungible token market behaves like any other market. Token prices adjust in relation to supply and demand. Thus, if several Bored Ape or Mutant Ape come to be sold massively by the protocol, this will affect the prices of the collections since the supply grows and the demand remains the same.
According to Twitter user CirrusNFT, 2.8% of Bored Ape would be blocked in this protocol. Therefore, if a decline continues to operate, this could give rise to a cascading liquidation of NFTs.
BendDAO to the rescue of investors
Very concerned by the situation, BendDAO is trying to find a solution to this problem which could on the one hand scare away future users, and on the other hand cost the platform dearly if prices do not go up.
The platform wants to relax some of the terms of the contracts to allow less drastic liquidations.
“We are sorry that we underestimated how badly NFTs could ride through a bear market when setting initial parameters. Over the past few days, we’ve received tons of comments and suggestions from the community,” says BendDAO.
As a true decentralized platform, the protocol will of course leave the choice to users via its DAO system (decentralized autonomous organization).
About NFTs
What is an NFT?
An NFT is the abbreviation of Non Fungible Token or non-fungible token in French. NFTs are cryptographic tokens issued on a blockchain.
By exploiting this technology at the genesis of cryptocurrencies, NFTs inscribe inviolable properties in this virtual register. As a result, NFTs are true attestations of digital ownership.
Is an NFT necessarily an image?
A distinction must be made between an NFT and the object associated with it. Indeed, the non-fungible token is above all a virtual property certificate and not the digital file as such. An NFT is usually associated with a photo or video, but it can also take the form of text, music or any other digital or physical format.
What is an NFT used for?
NFTs are generally used to assert property rights online. Thus, the owner of a token of a virtual work can collect royalties, ensure respect for the intellectual property of his digital object, etc.
This feature has notably enabled the NFT to shine in art by creating value and rarity in digital images available on the web. Also, beyond art, this technology offers multiple uses in several sectors such as in video games, the traceability of a product, etc.
How is the value of an NFT defined?
These tokens are non-fungible, i.e. they have a unique value unlike cryptos, which are fungible (1 bitcoin = 1 bitcoin).
The price of an NFT is therefore arbitrarily set by the owner of the token. This price is usually in cryptocurrency, most of the time in Ether (ETH).
How to buy and sell NFTs?
NFTs are generally bought or resold on trading platforms such as Opensea or Foundation.
What is an NFT mint?
The “Mint” or strike in French, is the initial sale process of a token. To permanently become part of the blockchain ledger, these new tokens must be mint. By this action, the user comes to complete a transaction with his fees to see his token appear first hand on the blockchain.