BendDAO hit by insolvency crisis as Ethereum reserves are depleted

BendDAO’s reserves briefly fell to 0.75 ETH early Monday.

BendDAO cannot repay lenders

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

The so-called “NFTfi” protocol saw its Ethereum reserves depleted over the weekend, meaning ETH borrowers are now unable to withdraw their deposits from the protocol’s reserves. According to Etherscan data, BendDAO’s Ethereum wallet held just 0.75 WETH early Monday. It has since received a deposit of 500 WETH and has 486.5 WETH at press time, down from around 18,000 WETH three days ago. The protocol had previously lent approximately 15,000 WETH.

BendDAO is a lending protocol built 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 the pool’s floor price in ETH. For example, with Bored Ape Yacht Club’s floor price currently around 67.9 ETH, Bored Ape owners can borrow up to 27.1 ETH. However, NFT depositors can have their assets liquidated if the floor price falls below a certain threshold.

Conversely, anyone who has ETH can deposit their money to the protocol to capture returns. BendDAO claims to offer 77.54% APR on ETH deposits with 73% paid in ETH and 4.53% paid in the BEND token. The yield comes from NFT holders paying interest on ETH borrowed against their NFT. However, according to the protocol’s website, the interest rate on these ETH loans is 93.96%. As the rate increases, holders are discouraged from repaying their loans. As a result, many have already defaulted and their NFTs have gone up for liquidation, creating a “bad debt” scenario similar to the subprime meltdown that caused the 2008 financial crisis.

Co-founder suggests adjustments

When the floor price for an escrow NFT falls too low, it is auctioned on BendDAO. However, the protocol requires bids to be above the borrower’s debt and at least 95% of the NFT pool’s floor price. Bidder must also lock ETH for 48 hours. This means that there is little incentive for anyone to bid if the borrower’s debt is too high, and this has led to many NFTs not receiving bids after they go to auction. More NFTs from coveted collections like Bored Ape Yacht Club, Mutant Ape Yacht Club, Doodles, and CloneX are currently on display at a “notification list” as they are at risk of liquidation. If many NFTs are liquidated at once, the market may suffer a collapse, which was feared with Bored Ape NFTs deposited to BendDAO last week.

While NFT depositors face losing their NFTs if their collection declines in value, those who deposited ETH into the protocol will also lose if the protocol does not raise enough funds to repay them. This weekend’s ETH drain suggests that many depositors have already lost confidence in the protocol’s ability to remain solvent. As fears of a “bank run” circulated, pseudonymous BendDAO co-founder CodeInCoffee assured the community in a Discord post that “the protocol is working as expected”, echoing similar assurances shared by Terraform Labs ahead of Terra’s infamous bank run. in May. They have since shared another proposal “help ETH depositors build trust”, including proposed changes to NFT’s liquidation threshold and auction period. “Hope WAGMI… let’s build together” they tweeted when announcement the 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 its significance after Bitcoin and the rest of the market crashed by more than 70% during the first half of 2022 .The proposal must now be accepted by the DAO in a governance vote to be adopted.

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