The NFT-collateralised crypto loans platform BendDAO attempted to recover from a near-catastrophic liquidity crisis over the weekend, a circumstance that highlighted the dangers of allowing individuals to borrow crypto money against their Bored Apes.
BendDAO resembles an old-fashioned bank: Some consumers deposit funds on the decentralised finance (Defi) platform, which then loans the funds out and returns a portion of the interest payments to the depositors. These loans are collateralised but with a crypto-twist: the collateral consists of images of monkeys, pixelated skulls, and other expensive non-fungible tokens (NFTs).
Fearing that the lender might fail, depositors withdrew their assets in masse over the previous few days, triggering a bank run that reduced BendDAO’s balances to a low of five ether (ETH) from more than 10,000 wrapped ETH. After the previous week, scores of BendDAO loans were in the platform’s danger zone, meaning the NFTs held as collateral were at risk of being liquidated.
Several depositors returned to the platform on Monday, and other borrowers repaid their NFT-backed loans, alleviating some of the pressure. This brief reprieve allowed BendDAO’s community to address the flawed liquidation mechanisms that prompted DeFi’s newest lending debacle. They are now scheduled to approve several operational adjustments to BendDAO.
BendDAO aims to protect itself from defaulting loans by selling its NFT collateral for ETH at auction. It is hard-coded to accept only bids that make the DAO entire, as revealed by DeepNFTValue’s Nikolai Yakovenko. This enables the protocol to reimburse depositors.
The disaster ensues when no one is willing to bid at BendDAO’s pricing. This weekend was tainted by volatile non-fungible token (NFT) markets and concerns about locking up assets during BendDAO’s two-day auction window. BendDAO was left with the possibility of retaining very illiquid ape JPEGs instead of the necessary ETH.
Yakovenko stated that they prohibit the DAO from being exploited in any manner whatsoever. They do not permit the DAO to incur any losses, which forces them to incur losses on everything.
Bank Run at NFT Lender BendDAO. Image: CoinDesk
“We are sorry that we underestimated how illiquid NFTs could be in a bear market when setting the initial parameters,” BendDAO members stated in a request to tweak the protocol’s operation and “create confidence” among ETH depositors.
BendDAO would progressively reduce the liquidity barrier from 95% to 70%, reduce the liquidation amnesty window from two days to four hours, and boost interest rates to encourage more ETH deposits and repayments.
The 48-hour amnesty scheme of BendDAO allows borrowers to save their NFT by repaying the loan plus a penalty. This liquidation protection eventually worked against the protocol; bidders did not want to tie up their assets in an auction that may result in the borrower reclaiming their NFT or – even worse – paying for an item that declined in value during the interim.
Monday afternoon, holders of BendDAO’s native governance token BEND voted overwhelmingly in support of the proposal’s quorum, indicating the motion would likely pass and take effect Tuesday.