The lending market for non-fungible tokens (NFTs) has seen a remarkable surge in popularity among investors, reaching unprecedented levels reminiscent of the 2022 bull market. Within this landscape, we uncover a fascinating story about an Azuki whale who capitalized on a flaw in a lending protocol oracle to acquire 50 Azukis at no cost.
A Fortuitous Acquisition of 50 Azukis
Just a few days ago, a prominent NFT investor known as “JpegMorganLiquidity.eth” purchased 50 Azukis for approximately 9.65-9.80 ETH during a significant market dip. Swiftly thereafter, the investor borrowed 9.7 ETH from LiquidNFTs, a decentralized finance peer-to-pool platform that accepts blue-chip NFTs like Azuki as collateral for loans.
JPML
Earlier this week, Chiru Labs, the digital assets incubation studio behind the popular Azuki NFT collection, launched a new series called Azuki Elementals. Unfortunately, the highly anticipated minting event fell short of many NFT investors’ expectations.
The Azuki Elementals NFTs bore a striking resemblance to the original Azukis, leading to dissatisfaction among crypto investors and causing the floor price of Azukis to plummet from 14 ETH to below 10 ETH within hours. Consequently, JpegMorganLiquidity.eth essentially obtained a loan-to-value ratio of 100% against the borrowed liquidity.
How Did This Happen?
LiquidNFTs’ oracle was slow to update and mistakenly believed that Azukis were still valued at the initial 14 ETH. Hence, granting a 9.7 ETH loan against 14 ETH of perceived value seemed relatively safe. However, the oracle’s information was inaccurate, as Azukis had already experienced a decline of over 30%, rendering the loan incredibly risky.
Given the current market conditions, the NFT lending protocol faces a potential loss of over 90%. With the price now below 9.7 ETH, it is highly unlikely that JpegMorganLiquidity.eth will be able to repay the loan. If Azuki’s value drops further, let’s say to around 5 ETH, the lender would incur a loss of 50%. However, if Azuki rebounds to 9.7 ETH, the lender would be fully compensated.
On the other hand, JpegMorganLiquidity.eth now possesses a risk-free opportunity with Azuki, similar to holding a call option with a strike price of 9.7 ETH. If Azuki’s value surpasses 9.7 ETH, the investor can sell the 50 Azukis at will, generating pure profit. The process would involve repaying the loan, receiving the Azukis back, and selling them through Blur bids. If Azuki NFTs fail to exceed 9.7 ETH, the investor simply retains the 9.7 ETH, resulting in a breakeven outcome.
Crucial Lessons for NFT Platforms from LiquidNFT’s Oracle Incident
NFTfi, an emerging technology that combines NFTs with decentralized finance, has gained significant traction, attracting numerous players from the NFT and metaverse sectors. In May, the renowned NFT marketplace “Blur” introduced Blend, a peer-to-peer lending platform that enables users to borrow liquidity using their NFTs as collateral.
Following in Blur’s footsteps, Binance introduced Binance NFT Loan earlier this month, allowing NFT holders to secure ETH loans with their NFTs as collateral. As the NFT lending market expands, it becomes imperative for platforms to learn from the recent oracle mishap at LiquidNFT.
Lending platforms in the NFT space must recognize that offering crypto liquidity with a loan-to-value ratio of 70% is risky and lacks conservatism. Oracles must update promptly to avoid finding themselves in such precarious situations. Additionally, platforms should acknowledge that blue-chip NFTs can experience sudden price drops, leading to liquidations, similar to the volatility witnessed in the crypto market.