BendDAO hit by insolvency crisis as Ethereum reserves run out

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Key points to remember

  • BendDAO is a lending protocol for NFTs.
  • The project is currently suffering from an insolvency crisis as ETH depositors rushed to withdraw their funds, creating a bank run scenario that could crash the NFT market.
  • BendDAO co-founder CodeInCoffee has submitted a proposal to adjust the protocol, but it must pass a governance vote.

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BendDAO reserves briefly fell to 0.75 ETH early Monday.

BendDAO can’t repay lenders

As many in the NFT community feared last week, BendDAO is experiencing a bank run.

The so-called “NFTfi” protocol saw its Ethereum reserves depleted over the weekend, meaning ETH lenders are no longer able to recover their deposits to the protocol’s reserves. According Etherscan data, BendDAO’s Ethereum wallet only held 0.75 WETH early Monday. He has since received a deposit of 500 WETH and holds 486.5 WETH at press time, up from around 18,000 WETH three days ago. The protocol previously loaned around 15,000 WETH.

BendDAO is a lending protocol designed for NFTs. Its main value proposition is to allow NFT holders to deposit their assets as collateral to borrow ETH. When someone deposits an NFT into BendDAO, they can borrow up to 40% of that collection’s floor price in ETH. For example, with the Bored Ape Yacht Club floor price currently around 67.9 ETH, Bored Ape owners can borrow up to 27.1 ETH. However, NFT depositors may see their assets liquidated if the floor price drops below a certain threshold.

Conversely, anyone holding ETH can deposit their funds into the protocol to capture the return. BendDAO claims to offer 77.54% APR on ETH deposits with 73% paid in ETH and 4.53% paid in its BEND token. The return comes from NFT holders paying interest on borrowed ETH against their NFTs. However, according to the protocol’s homepage, the interest rate on these ETH loans sits at 93.96%. As the rate increases, holders are discouraged from repaying their loans. As a result, many have already defaulted and their NFTs have been liquidated, creating a “bad debt” scenario akin to the subprime mortgage meltdown that caused the 2008 financial crisis.

The co-founder proposes adjustments

When the floor price of a deposited NFT falls too low, it is auctioned on BendDAO. However, the protocol requires offers to be greater than the borrower’s debt and at least 95% of the NFT collection floor price. The bidder must also lock the ETH for 48 hours. This means that there is little incentive for someone to bid if the borrower’s debt is too high, and this has resulted in many NFTs not receiving any bids after being auctioned. Several NFTs from wanted collections like Bored Ape Yacht Club, Mutant Ape Yacht Club, Doodles, and CloneX are currently appearing on an “alert list” because they risk being liquidated. If many NFTs are liquidated at the same time, the market may suffer a crash, as was feared with Bored Ape NFT filed at BendDAO last week.

While NFT depositors stand to lose their NFTs if their collection drops in value, those who have deposited ETH into the protocol also stand to lose if the protocol does not recover enough funds to repay them. This weekend’s ETH leak suggests that many depositors have already lost faith in the protocol’s ability to remain solvent. As fears of a “bank run” swirled, pseudonymous BendDAO co-founder CodeInCoffee reassured the community in a Discord message that “the protocol is working as intended,” echoing similar assurances shared by Terraform Labs. as Terra’s infamous bank run approaches. in May. They have since shared a proposal for “helping ETH depositors build trust”, including proposed changes to the NFT liquidation threshold and auction period. “I hope WAGMI… let’s build together” they tweeted when announcing plans to make adjustments. “WAGMI,” an acronym for “We Are Going to Make It,” was popularly recited by crypto hopefuls during the 2021 bull run, but lost meaning after Bitcoin and the rest of the market crashed by more than 70% in the first half of 2022. The proposal must now pass the DAO in a governance vote to pass.

Disclosure: At the time of writing, the author of this article owned ETH, some Otherside NFTs, and several other fungible and non-fungible cryptocurrencies.

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