BendDAO, a leading NFT lender, faces a dire liquidity crisis as its ETH levels have dropped to almost insignificant levels. Investors that used BendDAO to lend money to others who then leveraged their purchases of NFTs cannot withdraw their principal. The project has seen its funds nearly depleted. Therefore, its DAO must now determine whether to change its policy on liquidation thresholds.
How BendDAO works and why there’s reason to panic
By using BendDAO, users can store their valuable NFTs in a decentralized wallet and borrow up to 40% of the asset’s “floor price” in ETH. Conversely, depositors who who deposit and lend ETH receive interest on their deposits. However, it’s now clear that the incentives weren’t properly aligned. When news broke that $5.3 million worth of Bored Apes was in risk of being liquidated, investors were understandably frightened. Users panicked and withdrew their funds. This triggered a bank run that eventually left the platform with only 5 ETH in reserves.
The Bend DAO team announced fresh emergency steps on Monday to try and restore stability to the ecosystem. The Bend Dao development team proposed lowering the collateral liquidation requirement from 85% of the loan value to 70%. It hopes that this will prevent the credit crisis from threatening the protocol. Whether or not BendDAO’s decision making through subsequent recommendations will improve the mechanics of the lending process is the major gamble here.
In this case, the protocol might become a crucial part of a developing ecosystem that has yet to prove its resilience to severe testing. In addition, the consequences of bad debt committed by BendDAO’s lenders for Bored Apes and the Yuga Labs ecosystem are now unknown. There are concerns that it could set off a chain reaction of liquidations of Bored Ape. Ultimately, this could lead to major losses for the wider NFT ecosystem, considering Yuga Labs’ large market share.