Common mistakes with Blur’s Blend NFT lending liquidations

Azuki floor price volatility

Azuki floor prices dropped 44% in one day following the Elementals collection launch. The company raked in $38 million in 15 minutes during the Tuesday mint. This decline saw Azuki prices fall from over 14 ether to 9.7 ether, bringing the floor to approximately $24,000 or 10.4 ETH. Elementals floor prices dropped 55% as presale buyers dumped the new assets. The crash follows community complaints that the new art looks identical to the original 2022 Azuki collection. This discontent grew after the "Follow the Rabbit" event in Las Vegas. Charlotte Fang described the mint as a way for holders to extract 40 million dollars from the community. CryptoSlam reports nearly $45 million worth of Azuki sales over the last 24 hours, a 734% increase over the previous period. Sales volume increased almost 400% compared with last week as holders bailed.

Blend peer-to-peer mechanics

Blur’s Blend protocol facilitates peer-to-peer lending for NFT owners. Borrowers select an NFT collection or an item from their inventory to leverage and review aggregated loan offers. Lenders set fixed interest rates for specific collections and wait for borrowers to accept. Borrowers can repay the loan at any time by selling the NFT or repaying the principal. Lenders can also request payment if the asset value drops precipitously. This request starts an automatic Dutch auction process. The loan sale process starts at a 0% interest rate and can climb to 1,000% APR. This mechanism avoids the oracle manipulation risks seen in peer-to-pool platforms like Benddao or JPEG’d. In those peer-to-pool models, whales can use oracles to trigger liquidations by selling assets to lower the floor price. However, data shows that over 80% of Blend loans have a duration of less than two days, which suggests significant wash trading.

Will these Dutch auctions intensify the downward pressure on Azuki floor prices? You already know that volatility kills accounts, so watch your liquidation price.

Liquidation and margin risks

Liquidation occurs when the margin ratio reaches 100%. A higher margin balance provides better protection because it results in a lower liquidation price for long positions. Users who add more quantity to a losing position in cross-margin mode increase the liquidation price for the entire position. One trader lost $18,000 on a Crude Oil butterfly spread when a broker liquidated only part of the structure. This error left the trader with a naked long position and an immediate margin call. Such system errors create the very risk they supposedly prevent.

A trader lost over $18,000 when an automated risk system liquidated only part of a hedged butterfly spread, which left them with a naked long position and an immediate margin call. This event happened after a volatility spike. While other projects like Moonbirds saw floor prices bounce back by 41% after a drop to 17 ETH, Azuki remains the odd project out. If a user with a 1,000 USDT balance holds a 3,000 USDT long ETH position with 20x leverage at $3,000 and the price drops to $2,700, adding another 2,700 USDT long position at 20x leverage changes the liquidation price to $2,364.25. Traders should use stop-loss orders, such as a 10% stop-loss from an entry price of $70,000, to limit losses. A stop-loss order is a conditional order that triggers once a specified trigger price is reached, leading to execution at market or limit price.