Could BendDAO Collapse the NFT Market? Maybe

BendDAO is a so-called “NFTfi” challenge that lets NFT holders borrow ETH after they lock up their property. 

What Is BendDAO?  

Members of the crypto neighborhood are rising involved that one other potential liquidation cascade is on the horizon, this time within the NFT market. 

The nervousness facilities on BendDAO, considered one of a number of so-called “NFTfi” protocols that search to speed up the financialization of the NFT market. BendDAO is a lending protocol constructed for NFTs. ETH depositors can present liquidity to earn yield (it at present pays 8.15% APR in ETH and BEND), whereas NFT holders can borrow ETH after they lock up their property. In return, collectors get utility on their property past mere flexing or proudly owning a bit for the artwork itself. When somebody locks up an NFT in BendDAO, they’ll borrow as much as 40% of that assortment’s flooring worth. Nonetheless, if the ground worth drops and nears the unique worth of the mortgage, the NFT can be liquidated and put up for public sale. On this occasion, the borrower has 48 hours to repay the mortgage or face liquidation.

A pseudonymous NFT collector referred to as Cirrus took to Crypto Twitter to sound the alarm on BendDAO Wednesday, stating that $59 million price of NFTs had been deposited to the protocol as collateral with many susceptible to liquidation. They stated {that a} “terrifying” variety of Bored Ape Yacht Membership NFTs deposited to the protocol had been at a low well being issue, a measure used to find out when an asset is close to liquidation. 

Bored Ape Whale Sparks Cascade Fears

Quickly after Cirrus posted their tweet storm, the neighborhood’s fears grew after it emerged {that a} prolific Bored Ape Yacht Membership member who identifies as Franklin had borrowed 10,245.37 ETH (round $19.2 million at present costs) from BendDAO. Franklin is among the world’s greatest NFT whales, holding a portfolio of 60 Bored Apes. As they personal so many apes, the considerations stemmed from the concept that they might undercut the ground worth to repay their ETH debt. This might doubtlessly result in a liquidation cascade during which different apes deposited to BendDAO get bought off at a reduction as the gathering’s flooring worth drops (it’s price noting {that a} liquidation cascade may occur with another assortment, however few are as helpful or broadly used as collateral as Bored Ape Yacht Membership). 

Franklin took to Twitter Thursday to make clear that that they had repaid their debt to BendDAO, however that’s accomplished little to calm fears. Whereas the NFT market has to this point prevented any main liquidation occasions, different areas of the house have been hit arduous over the previous 12 months due to extreme use of leverage. Essentially the most notable cases of overleveraged crypto buying and selling involved the bankrupt crypto hedge fund Three Arrows Capital, which borrowed billions of {dollars} from main lenders via largely uncollateralized loans. The crypto lender Celsius, whose enterprise mannequin concerned promising prospects profitable yields, was considered one of Three Arrow’s Capital’s collectors, and it additionally went bankrupt because the market collapsed. Apart from lending to Three Arrows, Celsius turned to DeFi and merchandise like Grayscale’s GBTC and Lido’s staked ETH. With NFTfi protocols like BendDAO gaining tempo, crypto holders could also be proper to worry one other looming liquidity meltdown. 

Crypto Briefing reached out to Cirrus for remark however had acquired no response at press time.

Disclosure: On the time of writing, the creator of this piece owned ETH, Otherside NFTs, and different cryptocurrencies.