Bank Run at NFT Lender BendDAO Prompts Attempt to Avert Another Liquidity Crisis

Faulty auction mechanics highlighted the downside of letting people borrow money against their Bored Apes.

AccessTimeIconAug 22, 2022 at 9:55 p.m. UTC
Updated May 11, 2023 at 4:17 p.m. UTC

NFT-collateralized crypto loans platform BendDAO looked to right itself Monday after lurching through a nearly disastrous liquidity crisis over the weekend, a situation that underscored the pitfalls of letting people borrow crypto money against their Bored Apes non-fungible tokens.

BendDAO – from a distance – looks like an old-school bank: Some customers deposit money into the decentralized finance (DeFi) platform, which loans the money out, giving depositors a cut of the interest payments. Those loans are backed by collateral but with a crypto-quirk: that collateral is pictures of monkeys, pixelated heads and other pricey non-fungible tokens.

Over the past few days, depositors fearful the lender would fail withdrew their assets en masse, sparking a bank run that drained BendDAO’s reserves to a Sunday low of five ether (ETH) from more than 10,000 wrapped ETH. That happened after dozens of BendDAO loans were in the platform's danger zone at the end of last week, meaning the NFTs held as collateral were at risk of being liquidated.

The pressure partially abated Monday as some depositors came back 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 mechanics that sparked DeFi’s latest lending drama. They’re now slated to approve a series of changes to how BendDAO runs.

BendDAO attempts to shield itself from defaulted borrowers by auctioning off their NFT collateral for ETH. It's hard-coded to accept “only bids that make the DAO whole,” explained Nikolai Yakovenko, who runs NFT price website DeepNFTValue. That way, the protocol will be able to pay back depositors.

The trouble arises when no one is willing to bid at BendDAO’s prices. Cratering NFT markets and jitters about tying up assets in BendDAO’s two-day auction window proved toxic this weekend. BendDAO was left with the prospect of holding highly illiquid ape JPEGs instead of the ETH it needed.

“They basically don't allow the DAO to be leveraged in any way whatsoever,” Yakovenko said. “They don’t allow the DAO to take a loss on anything, which as a result makes them take a loss on everything.”

Next steps

“We are sorry that we underestimated how illiquid NFTs could be in a bear market when setting the initial parameters,” BendDAO participants wrote in a proposal that seeks to change how the protocol operates and “build confidence” for ETH depositors.

The proposed changes would see BendDAO gradually lower the liquidity threshold to 70% from its current 95%, shorten a liquidation amnesty window from two days to four hours and increase interest rates to incentivize more ETH deposits and repayments.

BendDAO’s 48-hour amnesty program gives borrowers time to rescue their NFT by repaying the loan and a penalty. This “liquidation protection” ultimately worked against the protocol; bidders didn’t want to lock up their assets in an auction that could end with the borrower clawing their NFT back or – worse – paying for an asset that fell even further in the interim.

Holders of BendDAO’s native governance token BEND had cleared the proposal’s quorum with votes overwhelmingly in favor Monday afternoon, signaling the motion will likely pass and take effect Tuesday morning.


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Danny Nelson

Danny is CoinDesk's Managing Editor for Data & Tokens. He owns BTC, ETH and SOL.