Can BendDAO Collapse the NFT Market? May be

BendDAO is a so-called “NFTfi” project that allows NFT holders to borrow ETH when they lock assets.

What is BendDAO?

Members of the crypto community are increasingly concerned that another potential liquidation cascade is on the horizon, this time in the NFT market.

The anxiety centers on BendDAO, one of several so-called “NFTfi” protocols that seek to accelerate the financialization of the NFT market. BendDAO is a lending protocol built for NFTs. ETH depositors can provide liquidity to earn returns (it currently pays 8.15% APR in ETH and BEND), while NFT holders can borrow ETH when locking assets. In return, collectors benefit from their possessions beyond simply bowing or owning a piece for the art itself. When someone locks an NFT in BendDAO, they can borrow up to 40% of the pool’s floor price. But if the floor price drops and approaches the original value of the loan, NFT will can be terminated and put up for auction. In this case, the borrower has 48 hours to repay the loan or face liquidation.

A pseudonymous NFT collector known as Cirrus took to Crypto Twitter to raise the alarm on BendDAO on Wednesday, pointing out that $59 million worth of NFTs had been deposited into the protocol as collateral (today the total collateral value is closer to HVA) with many at risk of liquidation. They said a “frightening” number of Bored Ape Yacht Club NFTs deposited into the protocol had a low health factor, a measure used to determine when an asset is close to liquidation.

Bored Ape Whale Sparks Cascade Fears

Shortly after Cirrus posted his tweetstorm, community fears grew after it emerged that a prolific Bored Ape Yacht Club member identifying himself as Franklin had borrowed 10,245.37 ETH (around $19.2 million at current prices) from BendDAO. Franklin is one of the world’s largest NFT whales, and has a portfolio of 60 chained monkeys. Since they own so many monkeys, the concerns stemmed from the idea that they could undercut the floor price to pay back the ETH debt. This could potentially lead to a liquidation cascade where other monkeys deposited into BendDAO are sold at a discount as the collection’s floor price falls (it’s worth noting that a liquidation cascade can happen with any other collection, but few are as valuable or widely used as security such as Bored Ape Yacht Club).

Franklin took to Twitter Thursday to clarify that they had repaid the debt to BendDAO, but that has done little to calm fears. While the NFT market has so far avoided major liquidation events, other areas of the space have been hit hard over the past year thanks to excessive leverage. The most notable cases of surrendered crypto trading involved the bankrupt crypto hedge fund Three Arrows Capital, which borrowed billions of dollars from major lenders through largely unsecured loans. Cryptolender Celsius, whose business model involved promising customers lucrative returns, was one of Three Arrow’s Capital’s creditors, and it also went bankrupt when the market collapsed. In addition to lending to Three Arrows, Celsius turned to DeFi and products such as Grayscale’s GBTC and Lido’s staked ETH. With NFTfi protocols like BendDAO gaining momentum, crypto holders may be right to fear another looming liquidity crunch.

Disclosure: At the time of writing, the author of this piece owned ETH, Otherside NFTs and other cryptocurrencies.