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How Bored Ape Ethereum Lender BendDAO Almost Failed

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How Bored Ape Ethereum Lender BendDAO Almost Failed

As NFTs for the bustling Bored Apes Yacht Club (BAYC) started hitting six figures last year, new credit markets have emerged– offering liquid collateral in the form of Ethereum to BAYC owners who have staked their monkeys as collateral.

But for any of these lending platforms, BendAO, that experiment turned sour last week, as the market value of BAYC and other top NFT collections, which skeptics consider little more than JPEG images, plummeted. Today, the decentralized platform holds a large stock of rapidly depreciating NFTs that it struggles to sell as owners default on their loans.

” I do not think so [NFT lending] was wrong – I just think the lending platform was horribly set up for a situation like this,” said Cirrus, a pseudonymous NFT trader. Fortune. He sounded the alarm on August 17 about a potential NFT liquidation stunt worth $59 million – the first of its kind for NFTs, but common for cryptocurrencies. “People are also less willing to splurge on JPEGs in times of macro uncertainty,” he said.

The collapse of BAYC also led to something of a bank run on Sunday as loan providers withdrew their funds from the platform, causing BendDAO’s total wallet holdings to drop by 10,000 ETH (16.5 million) to 5 ETH ($8,000). Since then, the platform balance bounced to 7,479 ETH ($12.3 million), as borrowers rushed to bail out their default-risk NFT collateral and willing buyers finally showed up to snag discounted NFTs. For now, the insolvency crisis has been averted.

But what led to BendDAO’s collapse in the first place?

It helps to know that on the surface, BendDAO works like an automated cooperative-owned digital bank. The platform accepts Ether (ETH) deposits from interest-seeking lenders and lends ETH from this pool to borrowers. Borrowers must lock an NFT as collateral in the platform’s digital vaults. If someone doesn’t repay their loan, the lending pool will automatically repossess the NFT, auction it off, and pay back their pool of depositors — or at least that’s how it’s supposed to work.

Since its creation in March, the platform has lent 56,000 ETH (about $929 million) to NFT holders. It was particularly popular among BAYC holders: 272 Bored Apes, or 3% of the collection of 10,000, were guaranteed through the platform. Some use the unlocked cash to purchase real-world assets, while others make strategic crypto bets. Franklin, who holds 59 NFT BAYCs and only goes by his first name, said Fortune he used BendDAO to “return more monkeys, basically by doubling down or taking advantage”. He took out 10,000 ETH ($16.5 million) in repeat loans from BendDAO, with no outstanding debt.

The platform set of strict rules— such as high minimum bid requirements for those willing to accept collateral as well as a 48-hour blocking of bidders’ ETH — initially deterred prolific NFT traders like Cirrus from participating. “[That] exposes you to the risk of burning yourself if the [market value of NFTs] continues to decline during this period,” he said.

BendDAO’s pseudonymous co-founder CodeInCoffee appeared to acknowledge issues with the site’s incentive structures on Monday, saying “We apologize for underestimating how illiquid NFTs could be in a bear market when setting initial parameters.”

CodeInCoffee also presented a successful proposal to increase liquidity on the platform by lowering bidding requirements and shortening lock-up periods.

Designing for fungible vs. non-fungible

Although the situation is now largely contained – even if it has left a bad taste in the mouths of its lenders and borrowers – the whole experience has highlighted a fundamental distinction in the crypto industry.

“NFTs are fundamentally different from fungible tokens [or cryptocurrencies]and financial products serving NFTs must capture the nuances of the underlying assets,” Conor Moore, co-founder of the NFT liquidity scaling platform MetaStreetTold Fortune.

BendDAO’s peer-to-peer lending is a flawed model for NFTs, he explained, “due to the critical assumption that liquidations will occur quickly and at a specified value – true for liquid markets and false for illiquid markets.

Moore pointed out that at the height of the BAYC liquidation crisis on August 21, BendDAO held 241 Bored Apes in its debt pool, which translates to approximately $20 million in loan exposure. This equates to 2,000% of BAYC’s daily spot trading volume of $1 million.

In contrast, he explained, the loan exposure of the largest peer-to-pool ETH lender MakerDAO on March 12, 2020, when the crypto market crashed due to Covid-19 fears. 19, was less than 2% of daily ETH volume.

“The correct basic building block for NFT loans is in a peer-to-peer format, with the borrower and lender agreeing on loan terms before creating the loan,” Moore concludes. “These building blocks can then be combined, abstracted, scaled and bundled into entirely new debt products.”

But the peer-to-pool structure isn’t necessarily the problem, according to Alex Ho, product manager at lending platform NFT Pine, which operates separate loan pools set up by lenders with their own loan terms. BendDAO, he said, operates a mixed pool that socializes losses among all depositors.

Gabe Frank, co-founder of peer-to-peer NFT lending platform Arcade, told Fortune that BendDAO “has built a product that market participants have found useful: DeFi loans versus NFTs. The design choice was simply wrong. There has always been this risk for lenders in a peer-to-pool model.

“It was an experience that didn’t end well,” he said.

Ekin Genç is a freelance journalist whose work has appeared in publications such as VICE, Decrypt, and CoinDesk.

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