Could BendDAO Collapse the NFT Market? Maybe

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

What Is BendDAO?  

Members of the crypto community are growing concerned that another potential liquidation cascade is on the horizon, this time in the NFT market. 

The anxiety 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 built 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 they lock up their assets. In return, collectors get utility on their assets beyond mere flexing or owning a piece for the art itself. When someone locks up an NFT in BendDAO, they can borrow up to 40% of that collection’s floor price. However, if the floor price drops and nears the original value of the loan, the NFT can be liquidated and put up for auction. In this event, the borrower has 48 hours to repay the loan or face liquidation.

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

Bored Ape Whale Sparks Cascade Fears

Soon after Cirrus posted their tweet storm, the community’s fears grew after it emerged that a prolific Bored Ape Yacht Club member who identifies as Franklin had borrowed 10,245.37 ETH (around $19.2 million at current prices) from BendDAO. Franklin is one of the world’s biggest NFT whales, holding a portfolio of 60 Bored Apes. As they own so many apes, the concerns stemmed from the idea that they could undercut the floor price to repay their ETH debt. This could potentially lead to a liquidation cascade in which other apes deposited to BendDAO get sold off at a discount as the collection’s floor price drops (it’s worth noting that a liquidation cascade could happen with any other collection, but few are as valuable or widely used as collateral as Bored Ape Yacht Club). 

Franklin took to Twitter Thursday to clarify that they had repaid their debt to BendDAO, but that’s done little to calm 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 instances of overleveraged crypto trading concerned the bankrupt crypto hedge fund Three Arrows Capital, which borrowed billions of dollars from major lenders through mostly uncollateralized loans. The crypto lender Celsius, whose business model involved promising customers lucrative yields, was one of Three Arrow’s Capital’s creditors, and it also went bankrupt as the market collapsed. Besides lending to Three Arrows, Celsius turned to DeFi and products like Grayscale’s GBTC and Lido’s staked ETH. With NFTfi protocols like BendDAO gaining pace, crypto holders may be right to fear another looming liquidity meltdown. 

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