Parsec Weekly #31
Your weekly dose of DeFi and NFT's, brought to you by Parsec
NFT market overview
-kezfourtwez
gm data hustlers, it’s been a hot minute since I’ve written about NFT’s and and in that time a lot has happened. The short and sweet version is that a few factors coming in from different angles converged and eventuated in a 30-60% market wide sell off, akin to the 3AC or FTX capitulations last year. But let’s get into some of the how and why backed up by some charts.
The first factor was leverage in the system. On April 29th Blur launched their flagship lending and borrowing functionality called Blend. Built directly into their main UI, It allowed users to do three main things with ease:
Borrow against their NFT’s
Lend their ETH against NFT collateral
Buy NFT’s for a fraction of the cost by borrowing the rest of the ETH using the same style loan as #1
Lenders are incentivised to offer loans at high LTV’s and low APY’s by the daily distribution of $BLUR points, a downstream effect is that borrowers who don’t have the capital to back up their loans, do so anyway because …gambol, hence the unhealthy build up of leverage and path to subsequent liquidation begins.
It’s a fairly automated system as lenders choose their terms and offer their loans based on the capital they currently have deposited into the blur pool. The same is true for refinancing and liquidations, there are always offers on the table and no manual intervention is required. Until things start going south, but more on that in a minute.
The combination of these three functionalities freed up liquidity for users and incentivised the use of leverage within the NFT market. With Azuki leading the way, at one point the Blur escrow wallet held 7% of the supply, meaning that 700 Azuki’s where either being borrowed against or had been bought on leverage, both being subject to potential liquidation.
All of this degeneracy and high leverage is fine whilst the market is up or even flat. In fact it contributed its fair share to Azuki’s rally from 14e —> 18e pre Vegas event. The chart below shows the daily activity on Blend since inception, basically up only until the crash.
The problems begin once either the wider market begins to really turn south, or one collection has a big enough drawdown that it starts a domino effect on the rest. In this case, the first domino to fall was the most levered collection, Azuki.
Enter factor #2: Elementals. 20,000 new NFT’s being minted under the Azuki name, a dutch auction starting at 2e a pop offered first to Azuki holders > Beanz > public. It sold out instantly at 2e, $40m to Chiru labs. A few hours after the mint and the collection revealed to show artwork very similar to the OG collection. No sneak peeks had been shown prior to the DA and holders were understandably pissed. Sentiment turned sour and they began puking into bids, the price fell quickly from 15e —> 8e and began to take the rest of the market with it.
40,000e in liquidity had just been sucked out of an already dry and demand stricken market, and the cascade began.
Floor price tumbles because of unhappy holders > over-levered borrowers can’t pay back their loans > lenders get stuck with quickly-decreasing-in-value jpegs > they dump into bids > borrowers start robbing Peter to pay Paul, and the chaos spreads to other levered collections > rinse and repeat until the market finally finds equilibrium
In two and a half months since the release of Blend there has been a total of 2832 liquidations across 9 collections
1245 of them were over the 6 day period following the Elementals mint
1435 of them have been either Azuki or Beanz
It took Azuki 9 days and a 70% drawdown from 17.5e -> 5.3e to find a bottom. During this time the broader market and most ‘bluechips’ experienced somewhere between a 30-60% drawdown.
Factor #3 was and still is the general sentiment surrounding NFT’s and the lack of organic demand, a lot of the buying pressure is due to leverage. In the chart below, the green dots are buys from the escrow wallet and the red dots are sales out of it. You can clearly see lots of BNPL knife catching as Azuki approached HTF support, but there was very little follow through, leverage quickly built back up and the process was repeated from 9e -> to the final bottom of 5.3e
Enough story time, it’s time to dump some charts on your heads and hammer home where the current NFT market sits.
This is the 30d balance of Azuki’s in the escrow wallet, showing a very clear and massive leverage flush during the first round of liquidations. From a top of 700 to a low of 210, but degens very quickly ran it back turbo and fuelled the second round.
I’m using Azuki as the benchmark metric here, but for context we are less than 3 weeks out from the crash and the market is already 74% as levered as it was at the top.
In the last 10 days alone there’s been 90,000e taken out in loans on Blend, though about 32% of those by count have been paid back. This is indicative of recycled volume and farming, 22,000 loans taken out -> 7200 paid back.
A few days after the bottom, two of the biggest lenders on Blend withdrew a combined 12,200e out of the pool, deposits are tapering off and TVL is down 18% from 91,500e -> 75,200e.
0x8bc may have capitulated the farming gig, but 0xcbb is still going strong as the largest lender in the last 10d at nearly 7000e in volume.
Total NFT volume had a massive spike during the ruckus but is now experiencing a sharp drop off, and reaching 2d levels not seen since before the $BLUR airdrop.
This crash had the all the characteristics of a capitulation event with the potential to carve out a real bottom, but after letting the dust settle for a couple of weeks, I personally don’t see any evidence of that being the case.
TLDR on the aftermath:
>sharp volume drop off
>big outflows from the pool + deposits tapering off
>bounce was an opportunistic quick flip with no follow through >leverage building back up with little organic demand
L2 season inbound?
-chulie
Following the XRP case resolution this past Thursday, markets inflected and alts took the lead for the first time in a long time. Beyond idiosyncratic outperformance in some names like SOL (and XRP itself!), one sector stood out in terms of unified outperformance; the L2s…
Over the past 7 days we see OP leading, closely followed by BIT (now MNT) with ARB hot on their heels. With EIP-4844 (an Ethereum upgrade which will significantly reduce fees, increase throughput and expand sequencer margins for L2s) taking place later this year, could this be a sign of participants positioning in advance?
LDO and other LSD related coins experienced significant outperformance prior to the Merge last year and Shanghai earlier this year - the point being that Ethereum upgrades often create narratives. Perhaps the market is telling us L2s are next in line for an Ethereum upgrade driven narrative.
With Base (Coinbase’s L2 which will pay 10% of sequencer revenues to Optimism due to building on the OP stack) going live for developers recently and Worldcoin rumored to launch soon, OP benefits from having its own tangential catalysts above and beyond the EIP-4844 tailwind. Notably, BIT is also benefiting from a colossal token burn (3 billion tokens or 31% of total supply) and the today’s Mantle (ByBit’s L2) mainnet launch whereby the BIT token converts to MNT. While having no specific catalysts other than EIP-4844, Arbitrum continues to be the most widely used L2 by a large margin and a hotspot for DeFi innovation. This sector is undoubtedly one to follow closely as we approach the proto-danksharding update later this year.
Thanks for reading, I hope you found this data and insight valuable.
For those who want to follow along on events like these, here’s a few layouts I personally use to track leverage in the NFT system and bidding pool flows.
wow
superbb