Detailed Instructions

Three primary models are used to determine the loan-to-value (LTV) ratio for an NFT used as collateral. The choice of model directly impacts risk for both the borrower and the lending protocol.

• Appraisal Model: A trusted third-party oracle or committee provides a valuation, often based on recent sales of similar assets. This is common for high-value, illiquid NFTs like CryptoPunks.
• Liquidation Price Model: The collateral is valued at a fixed discount to its floor price on a major marketplace. This is standard for PFP collections, where the floor is tracked by oracles like Chainlink.
• Peer-to-Peer (P2P) Model: The lender and borrower negotiate the valuation directly for a specific loan. This is used for highly unique assets without clear market comparables.

Tip: The LTV ratio is typically much lower for NFTs (20-50%) than for fungible assets due to higher price volatility and illiquidity.

Detailed Instructions

For collections using a liquidation price model, the protocol relies on an oracle to provide a trusted floor price. You must verify the oracle's data source, update frequency, and aggregation method.

• Sub-step 1: Identify the oracle service. For example, check if the protocol uses Chainlink's NFT Floor Price Feeds, which aggregate data from OpenSea, LooksRare, and other marketplaces.
• Sub-step 2: Check the update threshold and heartbeat. A feed might update when the floor moves by >5% or every 24 hours, whichever comes first. A stale price increases liquidation risk.
• Sub-step 3: Verify the collection is supported. Query the oracle contract directly. For a Chainlink feed on Ethereum for Bored Ape Yacht Club, you might call latestAnswer() on the proxy address 0x352f2Bc3039429fC2fe62004a1575aE74001CfcE.

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// Example using ethers.js to read a Chainlink NFT floor price feed
const feedAddress = '0x352f2Bc3039429fC2fe62004a1575aE74001CfcE';
const feedABI = ['function latestAnswer() view returns (int256)'];
const feedContract = new ethers.Contract(feedAddress, feedABI, provider);
const floorPrice = await feedContract.latestAnswer();
console.log(`Current floor: ${ethers.utils.formatUnits(floorPrice, 18)} ETH`);

Tip: Be aware of oracle manipulation risks; some protocols use a time-weighted average price (TWAP) to smooth out short-term volatility.

Detailed Instructions

The maximum loan amount is not the full valuation. It is calculated by applying the protocol's conservative LTV ratio and checking against any debt ceilings for the specific NFT collection.

• Sub-step 1: Obtain the collateral value. If using a floor price model, this is the oracle-reported floor price for your NFT's collection.
• Sub-step 2: Apply the LTV ratio. For example, if the protocol has a 40% LTV for BAYC and the floor is 50 ETH, your maximum loan is 20 ETH (50 * 0.40).
• Sub-step 3: Check the global debt ceiling. The protocol may limit total borrowing against a single collection to, for instance, 10,000 DAI to mitigate systemic risk. Your loan cannot exceed the remaining capacity.

Protocols like JPEG'd publish these parameters on-chain. You can query the pool contract for the collectionDebtCeiling and collectionLTV for a given collection address.

Tip: Always factor in potential liquidation penalties (e.g., 10-15%) and stability fees (interest). Your NFT must be worth significantly more than the loan to avoid being liquidated on a small price dip.

Detailed Instructions

Understanding the liquidation engine is critical. If your collateral value falls below the required threshold, anyone can trigger a liquidation to repay the debt, often acquiring your NFT at a discount.

• Sub-step 1: Identify the liquidation threshold. This is typically a higher value than the LTV ratio. If LTV is 40%, the liquidation threshold might be 55%. If value/loan falls below 181% (100/55), liquidation can occur.
• Sub-step 2: Review the liquidation process. Is it a fixed-price Dutch auction (e.g., starts at 110% of debt, decreases over time) or an English auction? Check the auction duration (often 24-72 hours).
• Sub-step 3: Calculate the liquidation penalty. This fee is added to the debt and paid to the liquidator. A 10% penalty on a 10 ETH debt means the liquidator must repay 11 ETH to claim the NFT.

solidityCopy
// Simplified logic for checking a liquidation trigger
function isLiquidatable(uint256 collateralValue, uint256 debtAmount, uint256 liquidationThreshold) public pure returns (bool) {
    // liquidationThreshold is a ratio, e.g., 5500 for 55%
    uint256 requiredCollateralValue = (debtAmount * 10000) / liquidationThreshold;
    return collateralValue < requiredCollateralValue;
}

Tip: Monitor your position's health ratio (Collateral Value / Debt) using the protocol's UI or subgraph. A ratio approaching the liquidation threshold signals high risk.

Detailed Instructions

Active management is required due to NFT price volatility. Use on-chain tools and alerts to track key metrics and take preventive action.

• Sub-step 1: Set up price alerts. Use services like Twitter bots or Discord webhooks that monitor the floor price oracle for your NFT collection. Get notified if the price drops by a set percentage.
• Sub-step 2: Plan for debt repayment or collateral topping. If the floor price drops, you can either repay part of the loan (reducing debt) or deposit additional acceptable collateral (increasing collateral value) to improve your health ratio.
• Sub-step 3: Understand the grace period. Some protocols have a time buffer after a liquidation is triggered before the auction starts, allowing you to save the position.

Consider using a DeFi dashboard that aggregates positions across protocols. For example, you can track your NFT loan health on DeBank or Zapper by connecting your wallet.

Tip: In a rapidly falling market, liquidity can dry up. Your NFT may liquidate for far less than its recent value if no one bids in the auction, resulting in bad debt for the protocol and a total loss for you.

Detailed Instructions

Every NFT lending protocol calculates a Health Factor (HF) for each loan, which is a numerical representation of its safety. This factor is derived from the loan's collateral value and its outstanding debt, including accrued interest. The formula is typically: HF = (Collateral Value * Liquidation Threshold) / Total Debt. A Liquidation Threshold is a protocol-specific parameter (e.g., 70%) representing the maximum loan-to-value ratio before liquidation.

• Sub-step 1: Query the current Health Factor using the protocol's smart contract or subgraph. For example, call getUserAccountData(userAddress) on an Aave-like contract.
• Sub-step 2: Track the floor price of the collateralized NFT collection via an oracle to determine the real-time collateral value.
• Sub-step 3: Monitor for the trigger point where the HF falls below 1.0. At this point, the position is eligible for liquidation.

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// Example pseudocode for checking health factor
const collateralValue = nftFloorPrice * liquidationThreshold;
const totalDebt = principal + accruedInterest;
const healthFactor = collateralValue / totalDebt;
if (healthFactor < 1.0) {
    console.log("Position is undercollateralized.");
}

Tip: Health Factors are dynamic. A drop in the NFT's floor price or a rise in debt from interest can push it below the threshold.

Detailed Instructions

When a loan's Health Factor drops below 1.0, the position becomes liquidatable. This creates an economic incentive for third-party liquidators (often bots) to repay the borrower's outstanding debt in exchange for the collateral NFT at a discount. The process is permissionless and automated.

• Sub-step 1: Liquidators scan the protocol for undercollateralized positions using event logs or dedicated keeper networks.
• Sub-step 2: The liquidator calls the liquidate() function on the protocol's main contract, specifying the borrower's address and the NFT collateral ID.
• Sub-step 3: The contract validates the position, ensuring the HF is below the threshold and the debt is repayable.
• Sub-step 4: The liquidator's transaction repays the debt (principal + interest + a potential liquidation penalty) to the protocol's liquidity pool.

solidityCopy
// Simplified interface for a liquidation function
function liquidate(
    address borrower,
    uint256 nftId,
    uint256 debtToCover
) external nonReentrant {
    require(healthFactor(borrower, nftId) < 1.0, "HF not below threshold");
    // ... logic to repay debt and transfer NFT
}

Tip: The liquidation bonus or discount (e.g., 5-15%) is the liquidator's profit motive, but it represents a loss for the borrower beyond their initial collateral.

Detailed Instructions

Upon successful validation, the smart contract executes the core settlement. It transfers the collateral NFT from the protocol's escrow to the liquidator and clears the borrower's debt from the ledger. The borrower's obligation is extinguished, but they lose their NFT.

• Sub-step 1: Debt settlement: The contract deducts the debtToCover amount (in the borrowed asset, e.g., ETH) from the liquidator's balance and burns the equivalent debt tokens from the borrower.
• Sub-step 2: Collateral transfer: The contract calls safeTransferFrom() to move the NFT from the protocol's vault contract to the liquidator's address.
• Sub-step 3: Event emission: The contract emits a LiquidationExecuted event, logging the borrower, liquidator, NFT ID, debt repaid, and collateral seized.
• Sub-step 4: Update protocol state: The global debt and collateral tallies are updated, freeing up the borrowed asset's liquidity for new loans.

solidityCopy
// Core logic inside a liquidation function
_repayDebt(borrower, nftId, debtToCover); // Burns borrower's debt tokens
uint256 liquidationBonus = (debtToCover * LIQUIDATION_BONUS) / 10000;
uint256 totalCollateralCost = debtToCover + liquidationBonus;
// Transfer NFT to liquidator
IERC721(nftContract).safeTransferFrom(address(this), msg.sender, nftId);

Tip: The liquidator often immediately sells the seized NFT on a marketplace to realize profit, adding sell pressure.

Detailed Instructions

After liquidation, all parties are in a new financial state. The borrower's debt is cleared but they suffer a total loss of their NFT collateral. The liquidator assumes the risk of selling the NFT. The protocol's solvency is maintained.

• Sub-step 1: Borrower's outcome: The loan is closed. The borrower receives no funds back and may face a liquidation penalty on top of the lost collateral. Their creditworthiness on the protocol may be affected.
• Sub-step 2: Liquidator's outcome: The liquidator owns the NFT, acquired at a discount to market value. Their profit is the difference between the NFT's sale price and the debt they repaid, minus gas fees and marketplace commissions.
• Sub-step 3: Protocol's outcome: The bad debt is removed from the system, protecting lenders. The liquidity pool is made whole with the repaid assets.
• Sub-step 4: Residual debt risk: If the NFT's market value is less than the debt (e.g., in extreme crashes), some protocols may have an insurance fund or socialized loss mechanism to cover the shortfall.

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// Calculating liquidator's potential profit
const debtRepaid = 10; // ETH
const liquidationBonus = 0.1; // ETH (1% bonus)
const nftSalePrice = 11.5; // ETH
const gasAndFees = 0.05; // ETH
const profit = nftSalePrice - debtRepaid - gasAndFees; // 1.35 ETH

Tip: Borrowers should use tools to set health factor alerts and consider adding collateral or repaying debt proactively to avoid liquidation.