Could BendDAO crash the NFT market?

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

What is BendDAO?

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

The concern is centered on BendDAO, one of several so-called NFTfi ” that seek to accelerate the financialization of the NFT market. BendDAO is a lending protocol designed for NFTs. ETH depositors can provide cash for a return (it currently pays 8.15% APR in ETH and BEND), while NFT holders can borrow ETH when they lock in their assets. In return, collectors get a utility on their assets beyond just bending or owning an NFT. When someone locks an NFT in BendDAO, they can borrow up to 40% of the floor price of that collection. However, if the floor price drops and approaches the original value of the loan, the NFT may be liquidated and auctioned. In this case, the borrower has 48 hours to repay the loan or face liquidation.

There are currently 32,267 ETH ($59,048,610) worth of NFTs being used as collateral for loans on BendDAO alone

For the first time ever, a lot of these are at serious peril of liquidation

A thread on the single biggest risk to the NFT market that nobody is talking about

– Cirrus (@CirrusNFT) August 17, 2022

An NFT collector known as Cirrus took to Twitter to sound the alarm on BendDAO on Wednesday, noting that $59 million in NFTs had been deposited on the protocol as collateral and that many were at risk of being liquidated. They stated that a number “terrifying“Bored Ape Yacht Club NFTs filed on the protocol had a low health factor, a measure used to determine when an asset is close to liquidation.

Bored Ape’s whale sparks cascading fears

Shortly after Cirrus posted his tweets, community fears increased after it emerged that a Bored Ape Yacht Club member who identifies himself as Franklin had borrowed 10,245.37 ETH (about $19.2 million at today’s prices) from BendDAO. Franklin is one of the largest NFT whales in the world, holding a portfolio of 60 Bored Apes. Because they own so many apes, the concerns stemmed from the idea that they might undercut the floor price to pay off their ETH debt. This could potentially lead to a liquidation cascade in which other monkeys deposited on BendDAO would be sold for less than the collection’s floor price (it should be noted that a liquidation cascade could occur with any other collection, but few are as valuable or as widely used as collateral as the Bored Ape Yacht Club)

I currently owe 0 ETH to BendDAO and have 60 apes in my wallet. I have borrowed 10245.37 ETH from them, and have paid it off plus 9.13 ETH total interest. If I was in debt 10k ETH, I would not payoff and would be chilling on an island right now. Starting a short spaces now. pic.twitter.com/qEf2xInzoA

– Franklin has 59 apes (@franklinisbored) August 18, 2022

Franklin went on Twitter on Thursday to clarify that they had paid off their debt to BendDAO, but that did 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 due to excessive use of leverage. The most notable cases of excessively leveraged crypto trading involved bankrupt crypto hedge fund Three Arrows Capital, which borrowed billions of dollars from large lenders through mostly unsecured loans. Crypto lender Celsius, whose business model was to promise customers lucrative returns, was one of Three Arrows Capital’s creditors, and it also went bankrupt when the market crashed. In addition to lending to Three Arrows, Celsius turned to DeFi and products like Grayscale’s GBTC and Lido’s ETH. With NFTfi protocols like BendDAO gaining traction, crypto-currency holders may be right to fear another impending liquidity collapse.