BendDAO in Liquidity Crisis As Panic Hits NFT Market!
What is BendDAO?
In this article, I’ll talk about an organization that we recently started to hear about: BendDAO! So, what is BendDAO, which has been especially associated with the "Liquidity Crisis" recently? What does it promise?
BendDAO is an NFT liquidity protocol developed to offer instant NFT-backed loans. In addition, BendDAO also supports "Collateral Listing" and “NFT Down Payment.” In this sense, it has the privilege of being the first NFT liquidity protocol.
BendDAO is decentralized and lets bluechip NFT holders instantly borrow ETH through the lending pool by using their NFTs as collateral. On the other hand, depositors provide ETH liquidity to earn interest.
How Does It Work?
The lender can make a minimum down payment of %60 to buy a bluechip NFT while initiating a flash loan from AAVE to cover the rest. NFT holders can request a loan of 40% of the NFT’s floor value as previously determined on BendDAO. The NFT-backed loans are then repaid by the buyer, along with interest after the deal.
To avoid losses caused by market fluctuations, BendDAO also has liquidation protection. If the floor value of the NFT drops below a certain threshold, borrowers will have 24 hours to sell their NFTs and repay the loan.
However, the Liquidity Crisis…
A short time ago, BendDAO’s contract reserves dropped from 10,000 ETH to less than 5 ETH due to a bank run! But why?
BendDAO ran into a situation where the values of bluechip NFTs started dropping very fast, and the market began to get illiquid, meaning that even though prices were falling, no one was buying. That started to scare lenders since borrowers might not pay back their loans, and the NFTs which are being auctioned will not be purchased because of the current market illiquidity. So, lenders started withdrawing their assets, sparking a bank run that drained BendDAO’s reserves completely.
But there’s even more bad news …
This Crisis Hit All Bluechip NFT Holders
BendDAO auction prices are directly tied up to these collections’ floor prices. Since the NFT market got illiquid and no one was willing to pay the current prices, BendDAO started to lower the prices of their currently auctioned NFTs, affecting the floor prices of these collections directly. That dragged down the floor prices lower and lower.
Bored Ape Yacht Club recently hit an eight-month low. Twitter user Cirrus tweeted that $59 million worth of NFTs were used as collateral in BendDAO, and many belonged to the BAYC collection. Of course, much unnecessary speculation about BendDAO and BAYC soon followed.
What Is the Solution?
After the incident, BendDAO pseudonymous co-founder CodeInCoffee planned a proposal to update the protocol's functioning and its parameters and build trust for ETH depositors. However, CodeInCoffe also expressed regret that they underestimated how illiquid NFTs can be in a bear market when setting the initial parameters.
These planned developments are expected to enable BendDAO to gradually lower its liquidity threshold from 95% to 70%, shorten the liquidation amnesty window from 48 hours to 4 hours, and increase interest rates to encourage more ETH deposits and redemptions.
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