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I’ve been thinking, could it be that the very high NFT prices is an economic trick? In other words, is this scenario possible:

-Alice have X value -So, Alice hires Bob off-chain to submit a rubbish NFT in an auction -Alice buyes the NFT at price X -Alice redeems (X-Y), pays Y to Bob -Alice put the NFT as an asset&get a loan2/3X -Alice makes a Profit=2/3X-Y

-If we assume Bob won’t settle for less than half Y=X/2 -Then Alice gains X/3 out of nowhere, probably less than the loan cost ( I mean interest rate)

-Infact, Alice could create like N addresses & make them look like N bidding account in her own auction with no need for Bob; ie transfer the Flashloan money to a different account of hers

-Makes me wonder, what are the liquidation rules for NFT assets??

-I'm not a developer, more of academic, so I do not pretend to know the accurate implementation details. In this thread post 45/46 https://ethresear.ch/t/cross-rollup-nft-wrapper-and-migration-ideas/10507/55

It is stated. *"A smart contract would have no way to check if the NFT is genuine. Only users will. If the smart contract is a market for trading NFTs, then user verification is probably good enough. Clients will disregard the fake wrapper and therefore not buy it through the contract.

But if the contract needs to do more complicated stuff with the NFT, such as use it as a collateral, then this method won’t work and we need canonical ownership. That would require occasional L1 transactions, although it could be O(1) for any number of NFTs by using a version of what I demonstrated here https://github.com/yoavw/cross-rollup-bridge "*

Still I can't find in there how it's calculated, there is the implementation details but not the formula/the auction details/... ie, how do you prevent the above scenario?or why it's not possible to happen

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  • I didn't say people shouldn't use NFT as a loaning asset,; I think they are already used with their known risks, I was asking what are the rules, precautions, possible attacks to be aware & mitigate them
    – ShAr
    Sep 18, 2021 at 9:19

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what are the liquidation rules for NFT assets

Because there is no fair market price for NFT, as they are unique, the best liquidation method would be an auction. In the auction, the NFT price could be 0 ... any, thus making NFTs too risk being used as a collateral.

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  • So, is the scenario above possible?I mean u didn't answer can someone create a fake auction bidding himself with a number of accounts (u wouldn't be able to know it is the same person), then use it as a collateral to get loans?
    – ShAr
    Sep 16, 2021 at 6:55
  • What you are describing is just the specific case of NFTs not having fair market value. Sep 16, 2021 at 7:13
  • So what is the answer? What is the criteria &cautions taken so that NFTs have fair market value?
    – ShAr
    Sep 16, 2021 at 18:20
  • NFTs should not be collateral and any system using them as such is stupid. Sep 17, 2021 at 7:58

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