News hardware The NFT industry in a panic, here’s why
While the NFT market has experienced a general decline in value following the decline in cryptocurrencies, the sector is not at the end of its surprises. A little-known protocol could send NFTs into a final bearish spiral.
NFT: a declining sector
As you know, non-fungible tokens have been flooding the internet for over a year. These virtual certificate-authenticated art collections on the blockchain have experienced an explosion in value. Monkey image with Bored Ape Yacht Club or even pixelated punk with Cryptopunks, these avatars have been the subject of an unprecedented speculative bubble.
However, the insanity was short lived as Bitcoin’s fall this year called everyone to order, whether it was altcoins or NFTs. Extremely related to cryptocurrencies, the price of many collections, including the most popular ones, has dropped significantly.
For example, the star favorite collection Bored Ape Yacht Club (BAYC) saw a significant drop in price. Going from € 400,000 or 155 eth to around 127,000 (75th) today, the price of the cheapest Bored Ape has suffered a double blow: the drop in market prices as well as the drop in Ethereum. However, it is important to remember that most investors in the early days and early months are still theoretically profitable as the price of a Bored Ape initially traded around 0.16th.
The selling pressure was obviously felt on the buying and reselling platforms. Since the beginning of the year, Opensea and others have faced a steady decline in trading volume. This decline in enthusiasm has led to massive layoffs in the industry in particular.
While we thought the worst was over for NFTs, the industry could be the victim of a new turnaround …
The protocol that threatens the NFT market
In recent days, the decentralized platform BendDAO has been on the lips of all the players in the NFT market. The lending protocol allows you to obtain cryptocurrency loans, by blocking its NFTs on the platform.
These lending platforms are very popular in the cryptocurrency industry. The concept is simple: a borrower deposits his assets as collateral to obtain a loan in stablecoin (stable cryptocurrency) or fiat currency (dollars, euros, etc.). Instead, the lender deposits his stablecoins or his Fiat currency to obtain variable rate income. Only, in the case of BendDAO, the borrower can use his digital works in NFT as collateral to get his loan.
With collections such as Bored Ape Yacht Club or Cryptopunks exploding in value, many have been able to take out this type of loan. There is no less than $ 59 million in NFTs deposited on the platform.
However, since the market is no longer as favorable as it was then, a clause protecting the platform from non-refunds could have serious repercussions.
In fact, if the price of the NFT as collateral falls below a certain cap – established by the platform based on the loan granted – then the protocol automatically sells the non-fungible token in order to recover liquidity. When the liquidation is initiated, the user has 48 hours to repay his loan and then cancel the sale of the NFT as collateral.
A cascade of NFT liquidations in sight?
You see it coming, the platform is paying a heavy price for the price drop of the entire NFT industry. The last few weeks have not been great for the non-fungible token market, as some NFTs have initiated liquidation, giving borrowers 48 hours to repay the loan.
The non-fungible token market behaves like any other market. Token prices adjust in relation to supply and demand. Therefore, if several Bored Ape or Mutant Ape are sold massively by the protocol, it will affect the prices of the collections as 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 result in a cascade liquidation of NFTs.
BendDAO to the rescue of investors
Very worried about the situation, BendDAO is trying to find a solution to this problem that could on the one hand scare future users, and on the other hand cost the platform dearly if prices do not rise.
The platform wants to loosen some contract terms to allow for less drastic liquidations.
“We are sorry we underestimated how badly NFTs could cross a bear market when we set the initial parameters. Over the past few days, we’ve received tons of feedback and suggestions from the community, ”says BendDAO.
As a true decentralized platform, the protocol will obviously leave the choice to users via its DAO (Decentralized Autonomous Organization) system.
What is an NFT?
An NFT is short for Non Fungible Token or non-fungible token in French. NFTs are cryptographic tokens issued on a blockchain.
Leveraging this technology to the genesis of cryptocurrencies, NFTs register inviolable properties in this virtual ledger. Consequently, NFTs are true claims of digital ownership.
Is an NFT necessarily an image?
A distinction must be made between an NFT and the object associated with it. The non-fungible token, in fact, is above all a virtual ownership 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 for?
NFTs are generally used to enforce property rights online. Therefore, the owner of a token of a virtual work can collect royalties, guarantee respect for the intellectual property of its digital object, etc.
This feature has in particular allowed NFT to shine in art by creating value and rarity in digital images available on the web. Furthermore, beyond the art, this technology offers multiple uses in different sectors such as in video games, in the traceability of a product, etc.
How is the value of an NFT defined?
These tokens are not fungible, i.e. they have a unique value unlike cryptocurrencies, which are fungible (1 bitcoin = 1 bitcoin).
The price of an NFT is therefore arbitrarily set by the token owner. This price is usually in cryptocurrency, most often in Ether (ETH).
How to buy and sell NFTs?
NFTs are typically 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 join the blockchain ledger, these new tokens must be new. With this action, the user gets to complete a transaction with his fees to see his token appear in first person on the blockchain.