BAYC's big collapse: one man guards the pass, ten thousand men are cleared

First, the crypto bear market quietly arrived, then Luna's bankruptcy and building collapsed. Now, the world's second largest FTX exchange has fallen from the industry leader to the altar in just a few days. Every piece of news continues to stir the nerves of the crypto market, and the NFT market is no exception. However, Yuga Labs, which is the only one in the market, seems to be unable to sit still.

Since the sale of "Monkeyland" ended in early May, BAYC under Yuga Labs seems to have been on a downward trend. According to NFTGO data, BAYC's market value has fallen from 4.298 billion US dollars at the end of April to 1.435 billion, a drop of 66.6%. The floor price has also fallen from the highest point of 145 ETH to 48.5 ETH a few hours ago, a drop of 28% in the past 7 days.

BAYC's floor price and number of pending orders

As the leading NFT, BAYC has always been priced high (even now it is worth $66,000 based on the floor price of 52 ETH). In the crypto bear market, almost all NFTs have fallen to varying degrees. BAYC holders want to sell them for cash, which has caused the floor price to fall. This is a very reasonable explanation.

However, the trading data in the last 24 hours is unusual: the floor price fell below 50ETH (a significant decline can be seen from the K-line chart of the floor price above), the 24-hour drop was 8.55%, and the trading volume surged to more than 2,700ETH.

BAYCs being liquidated in BendDAO

Due to the drop in the floor price, the BAYC pledged in the NFT lending platform BendDAO directly triggered the liquidation auction process, and a large number of BAYC are on the verge of triggering a liquidation auction.

(For an introduction to BendDAO’s lending and liquidation auction mechanisms, please refer to the article in April this year, “Use 1 BAYC to get 2 airdrops? A detailed explanation of “NFT Bank” BendDAO”. The relevant values ​​may be slightly updated at present.)

At this time, it was discovered that someone "manipulated" the floor price to trigger the auction liquidation of BendDAO. What's more surprising is that the "big short" behind the scenes is Franklin, the 7th largest holder of BAYC. At the time of FTX's collapse, let's talk about this "dumping arbitrage" incident and the FUD and truth behind Yuga Labs.

Table of contents

Is the monkey investor Franklin "dumping the market for arbitrage" or "clearing out the inventory"?

Franklin's response to the question

Let me first state the conclusion: there was no "clearance sale" but rather "dumping and arbitrage".

Franklin has been implementing this strategy for a long time, and even when BAYC's market is not good and it falls, he can still get very considerable profits. There is no need to be overly FUD, because the fatal point is not "falling" but "no takeover", and at present, neither BAYC's transaction nor BendDAO's liquidation auction bid has shown obvious stagnation.

How did he implement the "dumping and arbitrage" strategy?

Some of the BAYCs posted by Franklin

Franklin is a big monkey investor. Before today, he held 58 BAYCs, making him the 7th largest holder. His abundant NFT holdings gave him room to implement this strategy.

First, Franklin listed a bunch of BAYC at a price close to the floor price, and then accepted several lower offers and actually sold a few. In the recent panic, this wave of operations looks like a "clearance sale". The surge in orders caused panic among other holders, so a lower price than his order appeared, further pushing down the floor price. When BendDAO's oracle fed the price, the low floor price triggered BendDAO's liquidation.

In fact, he only sold 4 BAYCs by accepting low-price offers, and 14 BAYCs were used for mortgage loans.

Then, he put his 14 BAYC into BendDAO for collateral. With this loan and the ETH obtained from selling the above 4 BAYC, he bid for 7 BAYCs that were being auctioned and liquidated on BendDAO at a price range of 43.8-44.3 ETH.

Next, there are three situations that can satisfy him :

• If the borrower pays off more than half of the debt within 24 hours after the auction begins, the first bidder will receive a bonus of 5% of the total debt paid by the borrower. (Based on a 45E debt, the bonus is 2.25E)

• The borrower does not repay the debt, Franklin wins the auction and successfully completes the process of buying low and selling high. (i.e. the auction of 44E is successful, and then it is sold in the secondary market at the floor price of 50E)

• If the borrower does not repay the debt, Franklin does not win the auction and can call it quits or continue to lower the floor price until the second scenario is achieved.

Risk points :

If the floor price has fallen below 44E when he succeeds in the auction at 44E, he will incur a loss, but the probability of this happening is low.

The core is to go long with the "monkey-based" strategy

Franklin's strategy is essentially short-term bearish but long-term. He believes that the four low-priced offers he accepted will not be sold at a loss. Not only can he get the "first bid reward" on BendDAO, but he can also participate in the liquidation auction to buy high and sell low. However, if the floor price of BAYC cannot rebound, his strategy will not work.

Will it trigger a “serial liquidation” of BAYC?

In the short term, it will not trigger a "serial liquidation" of BAYC

In DeFi, it is often negative news that causes the price of mainstream digital assets such as Bitcoin and Ethereum to fall, resulting in the liquidation of some mortgage assets in the DeFi ecosystem due to insolvency. The liquidation and selling process triggers a further decline in mainstream digital assets, which also causes more assets to be liquidated due to insolvency. This cycle leads to "serial liquidations" of digital assets, and the price enters a "death spiral".

The NFT lending market is different from the DeFi market when it is liquidated, mainly due to the source of BendDAO's oracle feed price.

BendDAO’s oracle price feed mechanism

BendDAO's oracle feed price is the floor price data obtained by the off-chain node from OpenSea, Looksrare, and X2Y2. The NFTs being auctioned and liquidated are not placed on NFT trading platforms such as OpenSea for sale. Therefore, the floor prices of these secondary markets will not be lowered and the price data will not be fed to the oracle, causing the mortgaged NFTs within the platform to be further liquidated. In other words, the transaction price of the BendDAO liquidation auction will not be fed to itself.

In the long run, if the liquidation auction is not completed in time, it may have an impact on the market.

The impact of Luna’s collapse is far-reaching, and the aftermath of FTX’s collapse has not yet subsided. At the same time, the NFT market is in a cold winter. Unlike the last BendDAO run, the current "first bid reward" helps to digest the liquidation auction, which means that there is no need to worry about no one buying. However , when a large number of BAYC triggers a liquidation auction on BendDAO and is traded at a price lower than the secondary market floor price, repeatedly using the same strategy to "dump the market for arbitrage" may cause the floor price to fall further and trigger more liquidation auctions .

In a worse case scenario, if the floor price quickly falls below the borrower's debt amount, the lack of arbitrage space may cause BAYCs to remain in a state of no redemption or auction. In the long run, BendDAO may form an order wall similar to NFT trading platforms such as OpenSea , reducing the liquidity of other NFT trading platforms and causing the floor price in the secondary market to fall further, entering a vicious circle.

Will BendDAO experience a run this time like last time?

Let me first state the conclusion: most likely not.

From "BendDAO is insolvent, is NFT finally facing the subprime mortgage crisis?", we can refer to the serious run on BendDAO in August. At that time, the NFT market was cold and the floor price of NFT continued to fall. This may lead to more NFTs starting the liquidation auction process 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.

At the same time, the floor prices of many NFTs have quickly fallen below their debt prices. Restricted by auction rules (which require bids to be 95% higher than the floor price and higher than the debt price), most NFTs in liquidation auctions are either unable to bid or are unprofitable. Liquidators who have lost their arbitrage motivation choose to hold their coins and wait and see, which has resulted in a large number of NFTs with no one participating in the auction, further exacerbating liquidity runs.

Overview of blue chip NFTs pledged in BendDAO (Source: Dune@cgq0123)

There are many other blue chips pledged in BendDAO, but only 2 Doodles are currently being liquidated and auctioned.

At that time, the poor performance of the entire NFT market caused the floor price to fall, resulting in a lack of confidence among NFT traders; the small amount of bad debt problems at the beginning of the crisis were not resolved in time, resulting in a panic stampede among liquidity providers in the lending pool.

As of this writing, according to Dune data, BendDAO still has 31,422 ETH in its lending pool, and its reserves are in good condition.

This time, only BAYC experienced a serious liquidation auction phenomenon. After that incident, BendDAO made improvements to the mechanism, adjusting the liquidation threshold, auction cycle, bidding restrictions, base interest rate, etc. At the same time, it made improvements to the display pages in the UI interface that may cause misunderstandings and panic. Now, one of the key points of "dumping arbitrage", the "first bid reward", is also one of the improvement measures.

Summary: The last bank run was a "natural disaster" caused by the market and the BendDAO mechanism, and this time the large-scale liquidation auction of BAYC seems to be only caused by the "big short" Franklin who wants to "dump the market for arbitrage." "One man guards the pass and ten thousand men liquidate." Other blue-chip NFTs performed well and did not fall sharply in a short period of time. BendDAO reserves are in good condition, so there will not be a bank run as serious as last time.

In addition to BAYC, there are 5 MAYCs in the liquidation auction state, and a large number of MAYCs are on the verge of triggering liquidation. The question is again, behind the liquidation auction of the two flagship projects of Yuga Labs, which once dominated the market, why are their holders so panicked? Is there something wrong with Yuga Labs?

FUD Moment: Is Yuga Labs’ vault actually on FTX?

FTX collapsed, and panic was also spreading to projects closely related to FTX, with NFT leader Yuga Labs being the first to be hit.

The most funded projects that FTX Ventures participated in and their corresponding financing amounts

On November 8, CoinDesk summarized and announced the most funded investment projects of FTX Ventures and their corresponding financing amounts. Yuga Labs ranked first. According to reports, in March this year, Yuga Labs completed a $450 million financing with a valuation of $4 billion, led by a16z, and participated by FTX, Animoca Brands and others.

The huge amount of financing shows their close relationship, so is the money raised by Yuga Labs placed on FTX?

18,000 ETH of royalties went to FTX

Response from Garga, co-founder of Yuga Labs

In response to the doubts, Yuga Labs co-founder Garga said in a Discord thread on November 11 that the entire crypto market is paying attention to the serious consequences caused by FTX and SBF, but Yuga Labs does not have any funds on FTX. He wrote: "By the way, some people in the market have asked if we were affected by the FTX/Alameda incident. Yuga Labs has never used FTX.com and does not have any funds or assets on it. Although FTX is a small investor in Yuga Labs' seed round, it is clear that we received their checks a long time ago, and this will not affect our operations."

NFT analysis platform Compass publishes on-chain records to question

Just one hour later, the NFT analysis platform Compass took the lead: it announced the address interaction records of Yuga Labs' royalty income and found that more than 18,000 ETH were sent to FTX and 57,473 $APE were also sent to FTX.

Obviously, Garga's "safety statement" seems to be a lie and is not convincing.

Yuga Labs co-founder Wylie Aronow responded to the "rumors"

On November 12, Wylie Aronow, another co-founder of Yuga Labs, reiterated on his personal Twitter: "The FTX incident did not affect us. Although some of our partners may have used it, we have never used it. We have some funds on FTX, but we moved them out earlier this week." At the same time, Wylie Aronow released the withdrawal chain records and found that 19,666 ETH were indeed transferred from FTX.US (displayed as blockfolio on etherscan) to Coinbase on November 9.

Wylie Aronow meant that OpenSea sent the royalties to the FTX wallet, not Yuga Labs. He also seemed to mock those FUD people as "insane" and "amateur etherscan detectives."

CT refuses to admit it. It’s just a few dollars. Where did the big money go?

But "typing to prove innocence" seems unable to convince people

In fact, even if the nearly 20,000 ETH transfer records released by Wylie Aronow are true, their value is only more than 20 million US dollars, which is far from the 450 million US dollars previously raised. Compared with the entire treasury, it is just a drop in the bucket, so where did most of the funds go?

Wylie Aronow said: "The rest is in bank accounts and in U.S. bonds. Thanks to our friends who care about us, we are fine."

The "etherscan detectives" were unable to provide evidence, and Yuga Labs only "typed to prove its innocence." Compared to CEXs who were all raising money to build Merkle trees to prove that their reserves were sufficient, Yuga Labs' statement seemed to lack persuasiveness.

What is the truth?

Last night, Yuga Labs announced the acquisition of WENEW Labs and its flagship NFT series 10KTF

More radical "rumors" believe that Yuga Labs' announcement of the acquisition of 10KTF at this point in time seems to be a "show of strength": Look, we still have money for acquisitions, stop your FUD.

If Yuga Labs really lost most of its funds in the "FTX crash", then the panic of BAYC holders seems understandable. After all, without financial support, even the leading company may not survive the crypto winter.

When people are panicking, some people are mocking "trust Yuga as you trust FTX", while others are saying "a gentleman should not stand under a dangerous wall". What is the truth? Time will tell.