NFT Liquidation Shortfall Study and Protocol Risk

In this paper, we look to check the robustness of borrower and protocol protections within our collateralized lending offering.

A user deposits Non-Fungible Tokens (ERC-721) and/or Fungible ERC-20 tokens as collateral in order to borrow other ERC-20 tokens. The available Loan-to-Value ratios and various definitions can be found on our asset risk page.

The loan remains valid as long as the value of total collateral remains above the Liquidation Threshold as calculated by:

Executive Summary

Liquidation and risks to the protocol and borrower

To calculate maximum risk to the protocol we observe historical volatility in NFT collection floor prices and potential volatility as well as an additional margin for liquidation risk.

  • Assume a user has borrowed the full LTV available given posted collateral valued at the Floor Price of the NFT collection. Here

Liquidation occurs when the following conditions are met:

The table below summarizes data for all collections, while charts can be viewed for individual collections in the images which follow.

ETH Losses Given Liquidation

For this study we assume all NFT-collateralized borrowing is in ETH which itself is the quote currency for the NFT's themselves.

USD Losses Given Liquidation

Study of Bored Ape Yacht Club

Study of Azuki

Study of Doodles

Study of Mutant Ape Yacht Club

The Mutant Ape Yacht Club shows a modest risk profile for borrowers and the Protocol.

Study of CryptoPunks

According to our Liquidation model, the CryptoPunks collection would not have produced a loan Liquidation throughout the nearly-year-long price history in our sample.

Study of VeeFriends

The VeeFriends collection has historically shown itself stable as the basis for borrowing USD-denominated coins against the collection's NFT's.

Study of Bored Ape Kennel Club

Although more volatile than the Bored Ape Yacht Club collection, the Bored Ape Kennel Club has historically shown itself as stable collateral against USD-denominated borrowing.

Study of CloneX

According to on-chain data, the CloneX collection has historically shown itself as stable collateral against USD-denominated borrowing.

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