- The NFT sector has seen an alarming drop in interest. NFTs in Ethereum, Solana and Bitcoin were affected.
- BLUR’s Blend and Azuki Elementals played a big part in the recent market downturn.
At the beginning of the year, the NFT sector experienced a substantial increase in interest, driven by the introduction of Ordinals and other factors. However, over time, the NFT market witnessed a massive drop in overall market cap and volume.
About the last year, activity through networks such as Ethereum, Bitcoin and Solana fell significantly. According to Nansen’s data, NFT sales across all marketplaces on Ethereum fell significantly.
Source: Nansen
In addition, the number of active addresses on prominent exchanges also started to decrease based on Messari’s data. OpenSea, SudoSwap, and Blur noted a significant drop in activity in recent months.
Source: Messari
How did this all start?
Parsec Finance facts suggested that one of the main reasons for the decline in NFT interest would be the introduction of leverage into the NFT ecosystem.
On April 29, Blur introduced Blend, a leading lending and borrowing feature seamlessly integrated into the user interface. Users can easily perform three main actions: borrow against their NFTs, lend their ETH with NFT collateral, and buy NFTs with borrowed ETH.
To incentivize lenders, daily distributions of BLUR points were offered. For example, they are encouraged to make loans at high loan-to-value ratios and low annual rates of return. As a result, borrowers who lacked sufficient capital nevertheless took out loans, contributing to the accumulation of unhealthy leverage and leading to potential liquidation risks.
This combination of features increased liquidity for users and encouraged the use of leverage within the NFT market, with Azuki leading the way. At one point, the Blur escrow wallet held 7% of the offering, representing NFTs borrowed against or acquired with leverage, both subject to potential liquidation.
During bullish or stable market conditions, the highly leveraged behavior thrived. However, when the market went through a downturn, problems arose, potentially leading to domino effects as the significant downturn of one collection impacts others. In this case, the collection with the most leverage, Azuki, fell first.
Source: Parsec Finance
Azuki enters the picture
Another factor that played a major role here was Azuki’s Elemental launch. Elementals was a new batch of 20,000 NFTs minted under Azuki’s name that sold out immediately and raised $40 million for Chiru labs. The unveiling of similar artworks to the original collection upset owners, causing a sell-off and impacting the wider market.
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The sudden liquidity loss exacerbated the situation, leading to multiple liquidations of nine collections, including Azuki and Beanz. Azuki saw a 70% take-up over nine days as the broader market experienced similar downturns.
Source: Parsec Finance
