BendDAO insolvent as Ethereum reserves dwindle

The BendDAO is unable to repay its Lenders.

The past week confirmed what many people in the NFT community had anticipated would happen: BendDAO is facing a bank run.

The Ethereum reserves of the so-called “NFTfi” protocol were depleted over the course of the weekend, which means that ETH lenders will no longer be able to retrieve their deposits from the protocol’s reserves. Based on statistics provided by Etherscan, the Ethereum wallet belonging to BendDAO contained only 0.75 WETH at the beginning of Monday. Since then, a deposit of 500 WETH has been made, and the total amount held is now 486.5 WETH. This is a significant decrease from the over 18,000 WETH that it held three days before. Previously, the protocol had extended a loan of around 15,000 WETH.

The BendDAO protocol was developed specifically for use with NFTs. The primary value proposition it offers is the opportunity for holders of NFTs to borrow ETH using their assets as security. When someone makes a deposit of an NFT into BendDAO, they have the option of borrowing up to 40% of the floor price of that collection in ETH. For instance, given that the floor price of the Bored Ape Yacht Club is now somewhere around 67.9 ETH, owners of Bored Ape can borrow up to 27.1 ETH. NFT depositors, on the other hand, run the risk of having their assets liquidated if the price of the floor falls below a specified threshold.

On the flip side, anyone who is in possession of ETH can submit their cash to the protocol in order to capture yield. BendDAO asserts that it can provide an annual percentage rate (APR) of 77.54% on ETH contributions, with 73% of the return paid in ETH and 4.53% paid in its own BEND token. The yield is generated by holders of NFTs who are responsible for paying tax on ETH that was borrowed against their NFTs. On the other hand, the webpage of the protocol states that the interest rate on these ETH loans is now set at 93.96%. As the interest rate rises, holders will have less of an incentive to repay their respective loans. As a direct consequence of this, many have already defaulted on their NFTs, which has led to the creation of a “bad debt” scenario that is analogous to the subprime mortgage disaster that was the root cause of the financial crisis that occurred in 2008.

Alterations are suggested by a Co-Founder

When the minimum price for a deposited NFT falls to an unacceptable level, the NFT will be put up for auction on the BendDAO platform. However, in order to comply with the protocol, bids need to be higher than the borrower’s total debt and equal to or greater than 95% of the NFT collection’s floor price. Additionally, the bidder is required to hold onto ETH for a period of 48 hours. This indicates that there is little motivation for someone to place a bid if the borrower’s debt is too high, and as a consequence, many NFTs have received no bids after being put for sale as a result of this problem. Several non-fantasy trading cards (NFTs) from companies that are highly sought after, such as Bored Ape Yacht Club, Mutant Ape Yacht Club, Doodles, and CloneX, are presently on a “alert list” because there is a possibility that they will be liquidated. The marketplace could experience a collapse if a large number of NFTs are liquidated all at once, as was expected to happen when Bored Ape NFTs were submitted to BendDAO the week before last.

Those who placed ETH into the protocol run the risk of having their funds lost if the protocol is unable to reclaim enough cash to repay them if the value of their collection drops. Those who deposited NFTs run the risk of losing their NFTs if the value of their collection falls. The fact that ETH was spent over the weekend indicates that many people have already lost faith in the ability of the protocol to maintain its financial stability. Completely anonymous BendDAO co-founder CodeInCoffee convinced the neighborhood in a post on Divisiveness that “the protocol is collaborating as expected,” echoing similar reassurances shared by Terraform Labs in the lead-up to Terra’s infamous bank run in May. As fears of a “bank run” disseminated, CodeInCoffee’s post was an echo of similar encouragements shared by Terraform Labs. Since then, they have disseminated a plan to “assist ETH depositors in developing confidence,” which includes adjustments to the NFT liquidation threshold and auction time that are being considered. When they announced their intentions to make certain changes, they posted on Twitter, “Hope that WAGMI… let’s create together.” During the bull run in cryptocurrencies in 2021, hopeful investors frequently recited the abbreviated “WAGMI,” which stands for “We Are Going to Make It.” However, after Bitcoin and the rest of the market experienced a decline of more than 70 percent during the first half of 2022, “WAGMI” lost its meaning. In order for the suggestion to be approved, it will need to be approved by the DAO in a governance vote.