BendDAO the NFT liquidity crisis | Weekly Insights

Aug 26, 2022

Fundamental Insights

The Financial Crisis of NFT Market

The NFT market is facing an unprecedented challenge. Due to the decreasing market price of the NFTs, the largest NFT collateralized lending platform BendDAO is caught in a liquidity crisis.

As the first peer-to-pool NFT liquidity protocol, BendDAO lets users borrow ETH against their NFTs. Customers can typically take out a loan equal to 30% to 40% of the NFT collection’s floor price, or the minimum price to purchase one on the open market, with the NFT pledged as collateral.

The token reward program and friendly mechanism attracted a large number of users. As of May 3 2022, only 44 days after the launch, BendDAO got deposited 231 BAYC, 50 CryptoPunk, 126 Azuki, 288 MAYC, 21 Doodles and 108 CloneX, which made BendDAO the top 1 holder of BAYC and MAYC, top 3 holder of Azuki.

Be warned, according to the screenshot below, the APRs for both depositors and borrowers were highly positive at that time. It makes sense for the users to deposit their NFTs and ETH regardless of real need.

In past week, the fast falling NFT price caused the health factor of 28 deposited NFTs in BendDAO under 1, which tricked the liquidation events. Meanwhile, a larger number of NFTs with health factors between 1 and 1.2 are close to liquidation.

However, the trouble raised when no one was 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. BendDAO was left with the prospect of holding highly illiquid ape JPEGs instead of the ETH it needed.

Moreover, the worry about the liquidation problem sparked the massive withdrawal of ETH from the protocol. Additionally, the insufficient ETH reserve pushed the borrowing APR to unreasonably high.

The BendDAO team moves very quickly. BIP #9 and BIP #10 are proposed to adjust the implementation plan of Liquidation Threshold & Auction Duration considering the suggestions collected from the BendDAO forum.

BIP #9 is a very aggressive plan, which raises big concerns. According to the poor liquidation of the NFT market, the fast forced sales may lead to a series of liquidations and destroy the market. That is why the team proposed the BIP #10, which is more conservative.

According to the DuneAnalytics, more ETH has been deposited into the protocol which alleviated the pressure of illiquidity.

The ABCDE Capital proposed a plan to help provide 10,000 ETH for liquidation input in exchange for a token purchase agreement.

It seems that the first financial crisis of NFT market is temporarily contained. The lesson hurts but is beneficial to the market. NFT is still in its nascency so it is important to learn from the market and this past painful experience.