BendDAO: NFT liquidity protocol tested by bear market
BendDAO: NFT liquidity protocol tested by bear market
août 24 2022
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The bear market is not over yet, and the longer it stays, the more crypto protocols’ vulnerabilities emerge ❤️‍🩹

This week revealed a (relatively) new weakness in both DeFi and NFT worlds, and the industry is watching how it is being tackled.

🦧 The one doing the tackling is BendDAO, a decentralized peer-to-pool NFT liquidity protocol, allowing users to lock their NFTs as collateral and borrow up to 40% of their floor price. The protocol only accepted blue-chip NFTs like Bored Apes Yacht Club or CryptoPunks, and its creators were confident that the threshold of 95% of the current floor price was the right choice for auctioning off defaulted borrowers’ NFTs.

📉 However, even the most esteemed NFTs did not escape market downturn (BAYC floor has recently dropped to 8-month low), and many of BendDAO borrowers found themselves in danger of liquidation. This is where the initial blue-chip theory failed: the majority of recently defaulted NFTs have received no bids, showing how illiquid this type of asset can become in a bear market.

⚠️Reacting to this situation, users started to pull their ETH off BendDAO, draining its reserves to dangerously low levels: from the month’s high of 17’391 ETH to just 5 ETH at the lowest point on Sunday.

💸 BendDAO came very close to a liquidity crunch, but managed to stay afloat thanks to an influx of funds (defaulted borrowers repaying their debt, new lenders coming in), which filled the treasury with some 800 ETH. On Monday the DAO also voted on several emergency protocol upgrades, including progressively reducing the liquidation threshold to 70% of the floor price and reducing the buyers’ locked time to 4 hours (previously 2 days).

Time will tell if those measures were enough and if the very idea of DeFi lending-borrowing against collectible NFTs makes sense. In the meantime, the number of NFTs for auction at BendDAO has decreased following a slight rise in floor prices, those still on auction are getting bids, and the treasury now counts over 5’000 ETH.

If you are looking for some discounted Apes though, you might still try your chances there 😉