• BendDAO issues Ethereum loans with NFTs as collateral
• Depositors feared bankruptcy of the lender and triggered bank runs
• Developers propose protocol changes for better liquidation protection
Crypto lending platform BendDAO
BendDAO is the first NFT liquidity protocol to support instant NFT-backed loans, collateral listing, and NFT deposits. This means that customers who take out a loan in the form of Ethereum secure their loan here using NFTs such as those of the Bored Ape Yacht Club (BAYC). For their part, depositors can provide Ethereum for the lending pool in order to then earn on the interest on the loans. There is also a 48-hour liquidation protection, which is intended to avoid losses in value caused by market fluctuations should the borrower repay the loan within this period.
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BendDAO narrowly escapes a liquidity crisis
However, recently, according to CoinDesk reports, depositors have been withdrawing their funds en masse amid fears that the lender will go bankrupt. The resulting bank run saw the platform’s Ethereum reserves plummet from more than 10,000 Wrapped Ethereum on August 21 to a low of just five Ethereum. Depositors feared that dozens of BendDAO loans were in the platform’s danger zone, which in turn meant that the NFTs held as collateral were at risk of being liquidated. However, BendDAO narrowly escaped the liquidity crisis after some borrowers repaid their loans and other depositors returned to the platform the following day.
“BendDAO tries to protect itself from defaulting borrowers by auctioning off their NFT collateral for ETH. It is programmed to only accept bids that benefit the DAO,” CoinDesk quoted the operator of the NFT price website as saying DeepNFTValue, Nikolai Yakovenko. However, it becomes problematic if nobody is willing to bid the price of the BendDAO at the auctions. BendDAO was confronted with the prospect of holding highly illiquid NFTs instead of the required Ethereum. “They basically don’t allow the DAO to be leveraged in any way. They don’t allow the DAO to lose, which causes them to lose on everything,” Yakovenko explains.
Changes for liquidation protection
“We regret that when setting the original parameters we underestimated how illiquid NFTs can be in a bear market. Over the past few days we have received tons of feedback and suggestions from the community (BIP#8 Changing Lending Parameters). After a comprehensive Consideration and discussion, it is now time to come up with a proposal that should help ETH depositors build trust,” according to a developer of the platform. The proposed changes include, among other things, that the liquidity threshold should be gradually lowered from 85 percent to 70 percent by September 20. In addition, the auction period for NFTs is to be reduced from 48 hours to just four hours in order to improve the liquidity of the auctions.
E. Schmal / Editor finanzen.net
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