Bank Run at NFT Lender BendDAO calls for attempts to avert a new liquidity crisis
NFT-backed crypto-lending platform BendDAO appeared to be on the mend on Monday after going through a near-catastrophic liquidity crisis over the weekend, a situation that underscored the pitfalls of letting people borrow crypto against their Bored Apes.
BendDAO – from a distance – looks like an old-fashioned bank: Some customers deposit money on the decentralized finance (DeFi) platform, which lends the money, giving depositors a cut of interest payments. These loans are backed by collateral, but with a crypto quirk: this collateral is images of monkeys, pixelated heads, and other expensive non-fungible tokens (NFTs).
Over the past few days, depositors fearful of the lender’s failure have pulled out their assets en masse, sparking a bank run that drained BendDAO’s reserves to Sunday’s low of five ethers (ETH) from more than 10,000 wrapped ETH . It happened after dozens of BendDAO loans were in the platform’s danger zone late last week, meaning the NFTs held as collateral were at risk of liquidation.
Read more: Many Bored Ape NFTs are at risk of liquidation when borrowed money comes back to bite
The pressure partially eased on Monday as some depositors returned to the platform and other borrowers repaid NFT-backed loans. The instant relief gave BendDAO’s community a chance to address the flawed liquidation mechanics that triggered DeFi’s latest lending drama. They must now approve a number of changes to how BendDAO runs.
BendDAO attempts to shield itself from defaulting borrowers by auctioning off their NFT collateral for ETH. It is hard-coded to accept “only bids that make the DAO whole,” explained Nikolai Yakovenko, who runs NFT pricing website DeepNFTValue. In that way, the protocol will be able to pay back depositors.
The problem increases when no one is willing to bid on BendDAO’s prices. Cratering of NFT markets and jitters about tying up assets in BendDAO’s two-day auction window proved toxic this weekend. BendDAO was left with the prospect of holding highly illiquid monkey JPEGs instead of the ETH it needed.
“They basically don’t allow the DAO to be exploited in any way,” Yakovenko said. “They don’t allow the DAO to take a loss on anything, which as a result makes them take a loss on everything.”
Next step
“We regret that we underestimated how illiquid NFTs could be in a bear market when we set the initial parameters,” BendDAO participants wrote in a proposal that seeks to change how the protocol works and “build confidence” for ETH depositors.
The proposed changes would see BendDAO gradually lower its liquidity threshold to 70% from the current 95%, shorten a liquidation amnesty window from two days to four hours, and increase interest rates to encourage more ETH deposits and refunds.
BendDAO’s 48-hour amnesty program gives borrowers time to save their NFT by repaying the loan and a penalty. This “liquidation protection” ultimately worked against the protocol; bidders did not want to lock up their assets in an auction that could end up with the borrower repossessing the NFT or—even worse—paying for an asset that fell further in the interim.
Holders of BendDAO’s native governance token BEND had cleared the proposal’s quorum by overwhelming votes by Monday afternoon, signaling that the proposal is likely to pass and take effect Tuesday morning.
