NFT-collateralized crypto lending platform BendDAO declared itself normal on Monday after experiencing a near-catastrophic liquidity crunch over the weekend, a situation that underscores the pitfalls of when allows people to borrow crypto against their Bored Apes.
The faulty auction mechanism highlighted the downside of allowing people to borrow money for their Boring Monkeys.
BendDAO – from a distance – looks like a classic bank: Some customers deposit money into a decentralized finance (DeFi) platform, which lends money, helping depositors cut payments interest payment. Those loans are backed by collateral but with a quirk: that collateral is an image of monkeys, pixelated heads, and expensive non-fungible tokens (NFTs) .
Over the past few days, depositors have feared that lenders will fail to drain their assets consistently, triggering a wave of bank runs that deplete BendDAO’s reserves to its lowest point on Sunday. is 5 ether (ETH) from over 10,000 ETH wrapped. That comes after dozens of BendDAO loans fell into the platform’s danger zone late last week, meaning NFTs held as collateral are at risk of being liquidated.
The pressure eased somewhat on Monday as some depositors returned to the platform and other borrowers repaid their NFT-backed loans. That momentary relief gave BendDAO’s community a chance to grapple with the faulty liquidation mechanism that sparked DeFi’s latest lending drama. Now, they are expected to approve a series of changes to the way BendDAO works.
BendDAO tries to protect itself from default borrowers by auctioning their NFT collateral for ETH. Nikolai Yakovenko, who runs the NFT pricing website DeepNFTValue, explains. That way, the protocol will be able to return the money to the sender.
Trouble grows when no one is willing to bid at BendDAO’s price. Cratering the NFT markets and the buzz about asset binding during BendDAO’s two-day auction window proved toxic this weekend. BendDAO was left with the prospect of holding the highly illiquid ape JPEG instead of the ETH it needed.
“Basically, they don’t allow the DAO to be leveraged in any way,” Yakovenko said. “They don’t allow the DAO to lose on anything, thus making them lose on everything.”
Next step
“We regret that we underestimated the performance of illiquid NFTs in the bear market when setting initial parameters,” BendDAO participants wrote in a proposal seeking to change how the protocol works and “builds trust” for ETH depositors.
The proposed changes would see BendDAO gradually reduce the liquidity threshold to 70% from the current 95%, shorten the liquidation amnesty from two days to four hours, and raise interest rates to encourage more ETH deposits and refunds.
BendDAO’s 48-hour amnesty program gives borrowers time to rescue their NFT by repaying the loan and the penalty. This “liquidation protection” eventually worked against the protocol; Bidders who don’t want to lock up their property in an auction could end up with the borrower getting their NFT back or – worse – paying for a property that drops even further in time. there.
Holders of BendDAO’s native governance token BEND removed the proposed quorum with overwhelming support on Monday afternoon, signaling the proposal is likely to pass and go into effect on Tuesday morning.
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