BendDAO, which uses NFTs as collateral to lend Ethereum to borrowers, is in hot water.
The project’s DAO – a community centered around a shared initiative using blockchain-based tokens for collective voting – must now decide whether to adopt a new policy on the liquidation thresholds after seeing the treasury almost drained.
“They’ve run out of ETH,” Proof’s head of research, “punk9059,” wrote Sunday on a Twitter thread investigating the problem. “People who lend money to others via BendDAO to buy NFTs on leverage cannot withdraw their money.”
According to Etherscan data, the DAO’s wallet has since received a small influx of funds and now has about 425 ETH, but things aren’t exactly stable yet. A BendDAO co-founder, a Bored Ape Yacht Club NFT holder who goes by CodeInCoffee.eth, put the new proposal to a public vote on Monday in an effort to stabilize the DAO’s finances and restore confidence in the lending protocol.
The way BendDAO currently works is by enabling users to deposit high-value NFTs into the service and receive up to 40% of the asset’s “floor price” as a loan in ETH. On the other hand, users who deposit and lend their ETH earn interest on these deposits. But the incentives were clearly misaligned, and an imbalance between borrowers and lenders has led to a lot of bad debt going unpaid.
“We regret that we underestimated how illiquid NFTs could be in a bear market when we set the initial parameters,” the psuedonymous CodeInCoffee wrote on the DAO’s website.
Currently, when a borrower defaults on a loan, the NFT used as collateral is auctioned, but bidders are required to start at 95% of the NFT’s value based on the pool’s current floor price. If the emergency proposal passes, this liquidation threshold will be reduced over a three-week period, starting at 85% of the asset’s value until it reaches 70% by 20 September.
That means many valuable NFTs, including Bored Apes, CryptoPunks, Azuki and CloneX assets, may soon be foreclosed from their owners. However, the gradual reduction in the threshold is intended to avoid sudden liquidations, without owners “waking up and losing PFP”, according to CodeInCoffee. Aside from thresholds, the proposal will also reduce the time of each auction from 48 hours to 4 hours and increase interest rates for ETH borrowers.
Ultimately, the idea here is to make liquidation and acquisition of the NFT security more attractive to buyers. NFTs – unique blockchain tokens that signify ownership – are notoriously illiquid assets, making them much harder to sell than even fungible cryptocurrencies like Bitcoin and Ethereum. Lending protocols such as BendDAO aim to provide options for NFT holders who want liquidity without having to sell their NFTs, but such lending services can also be prone to liquidity issues themselves.
As of Monday afternoon, over 99% of eligible BendDAO members have voted in favor of the proposal with its quorum already reached.
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