In the last week, the NFT lending protocol BendDAO has been undergoing a liquidity crisis. A large amount of ETH deposits have been withdrawn over the past week. As of 4 p.m. on August 23, the protocol’s lending utilization rate reached 99.26%, with only 90.03 ETH of liquidity available. This means that the vast majority of ETH depositors will be unable to immediately retrieve their assets from the protocol. The worst appears to be over due to the urgent adoption of a new proposal. We analyze BendDao and the series of events.

I. What is BendDAO?

Bend DAO is a Decentralized Autonomous Organization (DAO) that addresses collateralized lending and borrowing of NFTs. Its purpose is to collateralize NFTs to borrow ETH for working capital or to deposit ETH and receive deposit proceeds. Bend is a decentralized, non-custodial NFT-backed lending protocol in which users can participate as depositors or borrowers. Depositors provide ETH liquidity to the lending pool to earn passive income, while borrowers can borrow ETH instantly through the lending pool using NFT as collateral. It supports instant NFT-backed loans, Collateral Listing, and NFT Down Payment.

NFT Liquidity

This is how blue-chip NFT holders are able to get the best liquidity on BendDAO.

Instant NFT-backed Loan

BendDAO is the first decentralized peer-to-pool based NFT liquidity protocol. NFT holders are able to borrow ETH through the lending pool using NFTs as collateral instantly, while depositors provide ETH liquidity to earn interest. The leveraged NFT trading is built on instant NFT-backed loans.

Collateral Listing

NFT holders/sellers can choose to instantly get up to 40% of the floor value of the listing before it even sells. The instant liquidity is provided by the instant NFT-backed loan. The buyer will pay off the loan including interest after the deal. Existing borrowers can list the collateral directly on the BendDAO. The balance after deducting debt with interest will be transferred to the borrower (seller) after the deal.

Buy with Down Payment

The buyer may pay a minimum down payment of 60%, depending on the actual price, to buy a bluechip NFT from major NFT marketplaces while initiating a flash loan from AAVE to cover the remainder. The borrowed amount of the flash loan will be repaid through the instant NFT-backed loan on BendDAO. The buyers will automatically become borrowers with the down payment. And borrowers can list their mortgaged NFT for sale as well.

Bend DAO functions like a bank that uses blue chip NFT as a stable asset to give users financial instruments that can be loaned to purchase or used as collateral to borrow. It also opens a pool of interest-bearing deposits to draw in funds to operate the platform.

II. Liquidation and Redeem

●Before the BIP#9

Liquidation is generally caused by a severe drop in the price of NFT. On BendDAO, this limit is represented by a “Health Factor” (HF), and liquidation is triggered when the Health Factor is less than 1.

Health Factor = (44 * 90%) / (40 + interests) <1

Health Factor = (Floor Price * Liquidation Threshold) / Debt with Interests.

What is the health factor?

The health factor is the numeric representation of the safety of your deposited NFT against the borrowed ETH and its underlying value. The higher the value is, the safer the state of your funds are against a liquidation scenario.

If the health factor reaches 1, the liquidation of your deposits can be triggered. A Health Factor below 1 may result in liquidity. For a HF = 2, the collateral value vs borrow can reduce by 1 out of 2 — that is, 50%.

The health factor depends on the liquidation threshold of your collateral against the value of your borrowed funds.

Risk level according to health factor:

• 0.0 < HF < 1.0: Dangerous, borrower maybe lose collateral if the debt is not repaid timely.

• 1.0 <= HF <= 1.5: Risky, borrower should repay partly the debt timely.

• 1.5 < HF < 2.0: Careful, borrower should pay attention and monitor the debt timely.

• 2.0 <= HF: Safe, borrower no need to worry and keep the debt last.

Liquidation will be triggered if the NFT loan’s health factor is below 1.

● Reason for liquidation

The NFT market has recently entered bear territory, with daily trading volume hovering at low levels for a long time and daily trading users flying down. The slump in the NFT market is the main reason for this current crisis involving BendDAO. The main price support for NFT is consensus, and when there is a lack of confidence in the NFT market, mass withdrawals could occur, similar to the reasons behind the instant collapse of Luna in May. However, the NFT market’s liquidity cannot be compared to that of tokens. From the perspective of users pledging blue chip NFTs, a lack of confidence in the NFT market might prove a good way to obtain timely NFT liquidity through a lending agreement, which is also equivalent to obtaining a partial price protection hedge.

In terms of BendDAO’s business, Bend only provides lending services if certain blue-chip NFTs are used as collateral, namely BAYC, CryptoPunks, MAYC, Doodles, Space Doodles, CloneX and Azuki. Among these blue chip NFTs, Big Monkey BAYC and Little Monkey MAYC form the majority, with over 83% of the collateral value in Bend.

At the time of the crisis, there were 230 BAYCs and 264 MAYCs pledged in Bend, and these BAYCs and MAYCs were most responsible for the creation and resolution of the crisis in BendDAO. Currently there are 22 BAYCs and 34 MAYCs in BendDAO with health factors below 1.1. Even if the price of NFT does not fall, the health factor will continue to fall over time due to the current high borrowing rates.

On the other hand, due to the limitations of BendDAO’s deposit and withdrawal mechanism, a large number of users are waiting to withdraw their deposits in BendDAO, and there are no more funds available in BendDAO, resulting in a substantial run on BendDAO. Despite having a high APR, users are not depositing in Bend. BendDAO’s rate regulation mechanism seems to have failed.

● How bendDAO solved the crisis

The BendDAO community has released a new proposal, BIP#9, which aims to address the liquidity crisis by modifying some of the parameters. These include adjusting the liquidation threshold to 70%, adjusting the auction cycle to 4 hours, adjusting the prime interest rate to 20%, and allowing the BendDAO community to vote on how to handle bad debts when they occur. In addition, the number of ETH floating bad debts will be added to the user interface and the total amount of interest will be displayed on the home page. Future protocol level improvements include support for collateral quotes in BendDAO, support for collateral pending orders as much as possible with access to transactions, and attempts to support down payments for auctions.

This proposal would lower the clearing threshold for NFTs and speed up the clearing of NFTs, thereby attracting more arbitrageurs to auction arbitrage. For those who are bullish on blue chip NFT, there will be plenty of opportunities to pick up the slack on BendDAO. On the other hand, however, if the proposal passes, there could be a significant sell-off of NFTs in the market. According to the health factor formula, if the liquidation threshold is set at 70%, collateral with a current health factor below 1.28 will be at risk of liquidation with the NFT floor price unchanged, and even if the floor price increases, the increase will hardly hedge out the impact of the liquidation threshold adjustment on the health factor. a large number of liquidated NFTs could pile up in BendDAO, and the impact on BendDAO may have a large pile of liquidated NFTs and a large impact on market confidence. The unique trading properties of NFTs can cause dramatic floor price swings due to small amounts of selling pressure.

●Current Status

The BendDAO website has been updated to show potential profits in the Available to Auction section to attract arbitrageurs to.

BendDAO has solved this liquidity crisis by passing the proposal quickly and effectively. BendDAO will anticipate risk and respond accordingly further down the line.

Written by: Lucio Lyu

Twitter: @imLucio_eth