Rising ether prices spark liquidity crisis at NFT lender BendDAO

One of the most popular lending platforms for holders of nonfungible tokens such as Bored Apes to borrow against their collections is revising its terms after a drop in prices threatened to trigger the liquidation of much of the collateral backing many of the loans.   

Bing Guan/Bloomberg

A majority of the community of investors known as a decentralized autonomous organization that runs BendDAO voted to support changes in the protocol's code to make borrowers' NFT collateral more liquid, while also enticing lenders to stay put with higher interest rate. Users had started rushing to withdraw deposits from the platform amid concern about a potential liquidity crunch on Friday. The total value of crypto assets locked in BendDAO's protocol dropped by about 50% to around $41 million during the weekend, according to data from DeFi Llama.

Lending against pricey NFTs, which are unique tokens on blockchains, has been one of the latest trends in crypto. The amount of ether that NFT owners can borrow on the platform is anywhere between 30% and 40% of the NFTs' floor price on BendDAO, which is the lowest set amount a bidder is eligible to buy an NFT from a collection. NFTs from the Bored Ape Yacht Club collection make up about 68% of the assets that serve as collateral on the BendDAO platform, while another 16% is from Mutant Ape Yacht Club tokens. 

The DeFi peer-to-peer platform enables NFT holders to borrow cryptocurrencies such as Ether without forcing them to cede control of the assets. Meanwhile, ether holders can lend out their tokens through the protocol and earn interest. Unlike centralized crypto lenders such as Celsius and BlockFi, the DAO allows participants to collectively vote for changes in the protocol's code.  

The recent rise in ether prices amid the general crypto bear market combined in part to trigger the large-scale liquidations on BendDAO last week. As the ether- denominated loans increased in value in dollar terms, the value of NFT collateral continued to depreciate. That triggered the protocol to begin a process to liquidate the collateral through auctions. 

The protocol had stipulated the bidding price or the liquidation threshold had to be at least 95% of the NFTs' floor price and gave borrowers 48 hours to pay down loans before liquidation. That has driven potential bidders away from the auction site since the prices weren't attractive and sparked investor concern that the price of the collateral was falling below the amount of debt outstanding. 

The DAO initiated a proposal on Monday under which the platform will lower the liquidation threshold to 70% from 95% and reduce the window for the borrowers to pay down their loans to avoid liquidation to four hours from 48 hours. The new terms aim to make it easier to liquidate NFTs, which have seen less liquidity amid the bear market.