Home Markets Could BendDAO crash the NFT market? Maybe

Could BendDAO crash the NFT market? Maybe

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Could BendDAO crash the NFT market?  Maybe

Key points to remember

  • Fears of a potential liquidation cascade in the NFT market circulated on social media today as a Crypto Twitter user pointed out that a large number of Bored Ape Yacht Club NFTs used as collateral were approaching liquidation points on BendDAO.
  • BendDAO is an “NFTfi” project that allows users to borrow ETH against NFTs deposited as collateral.
  • BendDAO deals exclusively with high-value NFTs, such as Bored Ape Yacht Club, CryptoPunks, and Azuki, which are considered a barometer for the broader NFT market.

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BendDAO is a so-called “NFTfi” project that allows NFT holders to borrow ETH when they lock their assets.

What is BendDAO?

There is growing concern among members of the crypto community that another potential liquidation cascade is on the horizon, this time in the NFT market.

The concern centers on BendDAO, one of several so-called “NFTfi” protocols that seek to accelerate the financialization of the NFT market. BendDAO is a lending protocol designed for NFTs. ETH depositors can provide liquidity to earn yield (it currently pays 8.15% APR in ETH and BEND), while NFT holders can borrow ETH when locking up their assets. In return, collectors get utility on their assets beyond simply bending or owning a piece for the art itself. When someone locks an NFT in BendDAO, they can borrow up to 40% of the floor price from that collection. However, if the floor price drops and approaches the initial value of the loan, the NFT can be liquidated and auctioned off. In this case, the borrower has 48 hours to repay the loan under penalty of liquidation.

A pseudonymous NFT collector known as Cirrus taken from Crypto Twitter to sound the alarm on BendDAO on Wednesday, pointing out that $59 million of NFTs had been deposited in the protocol as collateral, many of which were at risk of being liquidated. They said a “terrifying” number of Bored Ape Yacht Club NFTs deposited into the protocol were at a low health factor, a metric used to determine when an asset is close to liquidation.

Bored Monkey Whale Sparks Cascading Fears

Shortly after Cirrus posted their tweet storm, community fears grew after it emerged that a prolific Bored Ape Yacht Club member who identifies himself as Franklin had borrowed 10,245.37 ETH ( approximately $19.2 million at current prices) to BendDAO. Franklin is one of the largest NFT whales in the world, holding a portfolio of 60 Bored Apes. Since they own so many monkeys, concerns stemmed from the idea that they might lower the price floor to pay off their ETH debt. This could potentially lead to a liquidation cascade in which other monkeys deposited at BendDAO are sold at a discount as the floor price of the collection drops (note that a liquidation cascade could occur with n’ any other collection, but few are as valuable or widely used as collateral as Bored Ape Yacht Club).

franklin caught on Twitter Thursday to clarify that they had repaid their debt to BendDAO, but that did little to allay fears. While the NFT market has so far avoided any major liquidation events, other areas of the space have been hit hard over the past year thanks to excessive use of leverage. The most notable cases of over-leveraged crypto trading involved bankrupt crypto hedge fund Three Arrows Capital, which borrowed billions of dollars from major lenders through mostly unsecured loans. Crypto lender Celsius, whose business model involved promising its clients lucrative returns, was one of Three Arrow’s Capital creditors, and it also went bankrupt when the market crashed. In addition to lending to Three Arrows, Celsius has turned to DeFi and products like Grayscale’s GBTC and Lido’s staked ETH. With NFTfi protocols like BendDAO gaining traction, crypto holders may be right to fear another impending liquidity crash.

Disclosure: At the time of writing, the author of this article owned ETH, Otherside NFTs, and other cryptocurrencies.

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