An NFT-focused altcoin project has reached the brink of bankruptcy as Ethereum reserves are draining. The price lost more than 40%, then had the opportunity to recover today. Here are the details…
BendDAO unable to pay its debts, altcoin project on the verge of bankruptcy
BendDAO is an “NFTfi” protocol that allows NFT holders to deposit their assets as collateral to borrow ETH. BendDAO’s reserves briefly dropped to 0.75 ETH early Monday. As many NFT community members feared last week, BendDAO is experiencing a bank run.
The “NFTfi” protocol saw Ethereum reserves erode over the weekend. This means that ETH lenders can no longer get their deposits back from the protocol’s reserves. BendDAO’s Ethereum wallet held just 0.75 WETH as early as Monday, according to Etherscan data. It has since received 500 WETH deposits. The protocol currently holds 486.5 WETH, up from around 18,000 WETH the last three days. It had previously lent roughly 15,000 WETH.
Why did BendDAO crash?
BendDAO is a lending protocol built for NFTs. The main value proposition is to allow NFT holders to deposit their assets as collateral to borrow ETH. When someone deposits an NFT in BendDAO, they can borrow up to 40% of that collection’s base price in ETH. For example, the base price of Bored Ape Yatch Club is currently around 67.9 ETH, while Bored Ape holders can borrow up to 27.1 ETH. However, if the floor price falls below a certain threshold, NFT depositors can liquidate their holdings.
Conversely, anyone who owns ETH can invest their funds in the protocol to earn returns. BendDAO offers 77.54% APR on ETH deposits, 73% paid in ETH and 4.53% in BEND. The return comes from NFT holders who pay interest on borrowed ETH against their NFT. However, according to the protocol’s homepage, the interest rate on these ETH loans is 93.96%. The higher the rate, the more deterred owners are from paying back their loans. As a result, many have already defaulted and their NFTs have gone into liquidation. Thus, it created a “bad debt” scenario similar to the subprime mortgage meltdown that caused the 2008 financial crisis.
The effect of the bankruptcy has been felt hard since 19 August. Bend DAO (BEND) has lost 40% in just 3 days amid the sell-off in the altcoin market. Today, it had the opportunity to recover more than 5% from the lows.
The founding partner shared solution suggestions
When the floor price of a deposited NFT falls too low, it goes up for auction on BendDAO. However, the protocol requires that bids be at least 95% above the base price of the debt and NFT collection. The person who wants to buy must also lock the ETH for 48 hours. This means that there is little incentive for someone to bid if the debtor’s debt is very high. This has resulted in many NFTs not getting bids after going up for auction.
Writing a proposal to improve the protocol, including some parameters change, will post in the forum today and will effect 24hours after voting, hope that WAGMI.
— CodeInCoffee.eth (@CodeInCoffee) August 22, 2022
A few NFTs from sought-after collectibles such as Bored Ape Yacht Club, Mutant Ape Yacht Club, Doodles and CloneX are currently appearing on a “warning list” as they are at risk of liquidation. If many NFTs are liquidated at the same time, the market will suffer from a crash.
NFT depositors face losing their NFT if the value of their collections declines, while those who deposit ETH on the protocol lose out if the protocol does not recoup enough money to pay them back. This weekend’s ETH release shows that many depositors have already lost confidence in the protocol’s ability to remain solvent. BendDAO’s co-founder CodeInCoffee, navigating a “bankruptcy” scare, reassured the community in a Discord post that “the protocol is working as expected.” They have since shared a proposal to “help ETH depositors build trust,” including proposed changes to the NFT liquidation threshold and during the auction period.
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