An article to sort out BendDAO's bank run crisis

By William M. Peaster

Source: Bankless

BendDAO is an NFT lending protocol.

Concerns about bad debts pushed BendDAO into an on-chain bank run over the weekend, with its reserves dropping from ~18,000 WETH to less than 15 WETH at one point.

This credit crunch has thrown BendDAO into crisis, putting the project's lenders and borrowers in a bind for the time being. The good news is that at the time of this writing, the protocol’s reserves have recovered to over 4500 WETH, so the worst of the chaos may be behind us.

However, this incident led to many disastrous reports about the risks BendDAO posed to the broader NFT ecosystem. Let's sort out what actually happened.

What is BendDAO?

BendDAO is an NFT liquidity protocol, that is, an NFT lending project.

Borrowers can use the dapp to borrow ETH with NFTs from 7 top PFP NFT series, namely Azuki, BAYC, CloneX, CryptoPunks, Doodles, MAYC, and Space Doodles.

Instead, lenders can deposit ETH into the protocol’s liquidity pools, attempting to earn a yield on the interest paid by borrowers.

BendDAO thus uses a peer-to-pool model, in stark contrast to the peer-to-peer lending style (i.e. two people agreeing to negotiate terms) that first made their mark in the NFT ecosystem through projects like NFTfi .

This peer-to-pool approach supports three of BendDAO’s main products: instant NFT-backed loans (i.e. you don’t have to wait for peer-to-peer negotiations), collateral listings (i.e. get a minimum of 40% of an NFT’s value before it’s actually sold), and NFTs Down payment (i.e. purchase NFT with a 60% deposit using the Flash Loan strategy).

BendDAO's Bank Run

The BendDAO team later admitted , “underestimated how illiquid NFTs would be in a bear market when setting the initial parameters.”

The strictness of these first parameters has led to bad debts (due to failed liquidation auctions receiving NFTs instead of ETHs) to flood the DAO recently, which in turn led to the bank run we saw last weekend - lenders saw bad debts rise, many People exit quickly, withdrawing their deposited ETH while reserves remain.

So, why did the NFT auction fail? Because the original BendDAO parameters stipulate that the default liquidation bid must be higher than the outstanding debt of the NFT, and at least 95% of the current floor price of the NFT. Due to the recent drop in the floor price of many NFT series, the debt of many BendDAO NFTs exceeds the floor price of these NFTs. Additionally, bids must be locked for 48 hours.

These demands made these default auctions less and less attractive to liquidators, so BendDAO accumulated more and more "bad debt" NFTs, which in turn scared many lenders into withdrawing their deposits.

make emergency adjustments

On August 23rd, BendDAO passed an emergency parameter update to gradually lower the liquidation threshold from 95% to a new final baseline of 70% from September 20th. The DAO also agreed to reduce the bid lock period from 48 hours to 4 hours.

Ultimately, the end result of these adjustments will make BendDAO’s liquidation auctions more attractive to bidders, allowing a healthy flow of ETH back into the protocol and avoiding bad debt.

So, what is the most important conclusion? In the coming weeks, we are likely to see a surge in BendDAO liquidation auctions (depending on the performance of the floor price), as BendDAO positions gradually become more prone to default. If you're in the market for a top-tier PFP NFT, keep an eye out for these auctions in the coming weeks, as there could be some heavily discounted deals popping up.

Back to normal now?

BendDAO began to revive after its emergency adjustment, coupled with the recovery of the floor price, restored some confidence, and deposits also flowed into the platform again.

Can the project thus be restored to the point where it can pay all the money owed? At this point, it seems possible, although BendDAO isn't necessarily out of the woods either. Conversely, recent fears of contagion surrounding BendDAO have been greatly exaggerated.

epilogue

BendDAO’s credit crunch shows that the NFT lending space is still very nascent, and while there are many interesting innovations being produced in the space, the projects in it end up being experimental until they become more tested.

Unfortunately for BendDAO and its users, the protocol, with its initial poor parameters, is now fairly tested in production, although the project may have done enough to finally be able to operate in this environment. Get out of the storm. At the very least, you can guarantee that this episode will serve as an important warning for the future of other NFT peer-to-peer pool projects.