BendDAO is an NFTfi platform that gives out loans in Ethereum to its users while holding their NFTs as collateral. Generally, users on the BendDAO platform can borrow up to 30-40% of the floor price of the NFT collection they wish to use as collateral.
However, trouble has found its way into the BendDAO camp, as the NFT/crypto lending platform suffers from a severe insolvency crisis.
The way the NFTfi platform works is fairly simple. Users who need crypto loans deposit their NFTs as collateral and receive a loan equal to 30% – 40% of the floor price of the collection to which their NFT belongs.
However, if the floor price of that collection drops to a certain level, the platform is forced to put it up for auction.
The liquidation point of these NFTs is determined by their "health factor." When or if this metric falls below 1, the original owner of the NFT is given 48-hour liquidation protection, during which they have a chance to pay off their loan and reclaim their NFT. The NFT is auctioned off to the highest bidder if the user cannot meet this deadline.
Lenders can also deposit their Ethereum to be used as loans for the borrowers. The BendDAO protocol offers 77.54% APR on these Ethereum deposits, paid in both ETH and BEND (the platform's native token)
Take the Bored Ape Yacht Club's NFT collection, for example. The collection's floor price currently sits at 67.9 ETH. This means that BAYC owners can borrow up to 27.1 ETH (35% of its floor price).
According to the BendDAO homepage, the interest rate on these ETH loans sits at 93.96%. Over time, if the borrowers fail to pay back their loans, the interest rate can accumulate. An increase like this, as many knows, is a big demotivator for the borrowers to pay back their loans.
As a result, many have forfeited their NFTs. These NFTs go on auction, get sold to the highest bidder, and inadvertently create a "bad debt" scenario.
BendDAO's protocol, while effective, has a few issues. Their method of auctioning off NFTs is one of them.
When borrowers fail to pay off their loans, their NFT is lost. There is, however, a catch. Potential buyers of these NFTS cannot place bids below 95% of the floor price. These rules make it hard for bidders to buy the NFTs, especially when the debt of the original owner was on the high side.
If too many NFTs from a popular and fairly large collection get liquidated simultaneously, the entire NFT market could collapse.
Following the potential threat of a bank run last week, BendDAO co-founder under the pseudonym codeInCoffee reassured the BendDAO discord community that the platform is "working as expected." codeInCoffee has since shared a proposal to change the BendDAO protocol to "help ETH depositors build confidence."
These new changes are aimed at fixing the NFT liquidation threshold and auction period but must first pass a governance vote by the DAO.