What has BendDAO experienced from a 300-fold surge after going live to triggering a chain liquidation of blue-chip NFTs?

Author: Misty Sea, PANews

BAYC, representing blue-chip NFTs, is currently facing a chain liquidation reaction.

Recently, various assets in the NFT market have continued to decline. On August 19, the NFT collateral lending platform BendDAO conducted its first liquidation auction for BAYC. In the past three days, 28 BAYC and 28 MAYC have been liquidated, and the liquidation has lowered the floor price of NFTs, causing other NFT collateral to approach the liquidation threshold, triggering a domino effect. As of August 22, 20 BAYC on the BendDAO platform had a health factor of less than 1.1, and if it falls below 1, it will enter the auction phase. However, from the market dynamics, there are currently very few users willing to participate in the auction.

Why are there currently a large number of collateralized NFTs at risk of liquidation, yet few are participating in liquidation auctions?

From the borrower's perspective, data from August 22 shows that the lending rate on the BendDAO protocol has reached an annualized 103.71%, meaning borrowers need to repay 100% interest to reclaim their original NFTs, which directly reduces their motivation to repay. Rather than redeeming NFTs and facing the risk of further declines in NFT assets, it might be better to simply "give up" and wait for liquidation.

As the hype fades, the once-hot NFTs are now met with reluctance to participate in auctions. On one hand, market sentiment is pessimistic, and the overall market is declining, with NFT assets priced in ETH experiencing even greater declines. Moreover, according to BendDAO's mechanism, auction participants' funds need to be locked for 48 hours, and in the current market conditions, no one is willing to "take risks." On the other hand, according to regulations, auction bids must be greater than 95% of the NFT floor price. This seems to leave little room for profit for bidders. Additionally, under BendDAO's mechanism, if the auction ultimately fails to transact, the platform will bear the floating loss or the borrower will have to repay the debt in the future.

In light of the current situation, the BendDAO community released a new proposal on August 22, BIP#9, aiming to resolve the liquidity crisis by modifying certain parameters. This includes adjusting the liquidation threshold to 70%, changing the auction period to 4 hours, adjusting the base interest rate to 20%, and allowing the BendDAO community to vote on how to handle bad debts. Of course, there are discussions within the community that, while this proposal may instill some confidence in depositors regarding over-collateralization, it may also lead to more NFTs being hastily liquidated.

Additionally, the user interface will include the display of the number of floating bad debts in ETH and the total interest amount on the homepage. Future protocol improvements include supporting collateral quotes in BendDAO and engaging as many trading platforms as possible to support collateral listings.

Reflecting on NFT-Fi: Is it a mechanism flaw or a false demand?

In light of the liquidity crisis faced by BendDAO, people are beginning to question whether NFT lending is a false demand. Since the NFT market was ignited by blue-chip projects like BAYC in mid-last year, discussions about the NFT lending market have been ongoing.

NFT holders can borrow liquid funds to improve capital utilization; users providing liquidity can earn interest as extra rewards. The demand is simple and clear, and many teams have built and launched products. However, due to the peer-to-peer lending logic and the uncertainty of liquidation outcomes, lending efficiency has been extremely low, and very few people are interested.

In response to the liquidity crisis at BendDAO, DForce founder Mindao tweeted that the lending utilization rate within the BendDAO protocol is nearly 100%, pushing both supply and demand to their peak. The fundamental issue with NFT lending based on pools is the mismatch between assets (illiquid NFTs) and liabilities (ETH deposited on demand).

We can imagine a bank that only has demand deposits as its sole source of funding, while all its assets are real estate loans (or loans to art collectors). Such a banking model would not work in the financial world.

Taking the blue-chip NFT BAYC as an example, it is the largest NFT with a market value of $1 billion, but its daily trading volume is only $1.4 million, with a turnover rate of just 0.14%. What is the turnover rate of tokens with the same market value that qualify as DeFi lending collateral? About 5-10%.

Essentially, BYAC is an irreplaceable long-tail asset in DeFi standards. If you use on-demand liabilities to fund these assets, something will definitely go wrong in one way or another. There have been many such failed attempts in DeFi, such as Fuse (Rari)/Kashi (Sushi)/Beta.

Regarding the current issues faced by BendDAO, Mindao stated that there is no simple solution. BendDAO needs to take temporary actions to change the interest rate curve and lower borrowing rates so that liabilities do not reach a level where borrowers lack motivation to repay. This point is also included in the latest proposal put forward by the BendDAO community.

Additionally, Mindao believes that once BendDAO stabilizes, it may issue a debt token and participate in failed auctions to acquire those NFTs, then redistribute the debt tokens into ETH deposits to restart the system. However, there is no long-term solution to restore ETH liquidity to break the deadlock.

Detailed Explanation of BendDAO Mechanism: A 300-Fold Surge at Launch

BendDAO first entered the crypto community's view due to the FOMO at its launch, as a whale purchased the entire IFO with 2290 ETH, causing the originally planned 90-day IFO to end early on April 25, drawing widespread market attention for the first time. It is reported that the IFO sale price was 1 ETH for 333,333 BEND, with a total fundraising goal of 3000 ETH, conducted as a fair sale open to everyone, with no upper limit. 66% of the raised ETH would be used for the ETH lending pool on Bend, and 34% would be used for Bend protocol development.

On the night of the IFO's conclusion, the BEND token surged, with the price rising from a low of 0.006 to a high of 0.18 USDT, an increase of 3000%. Although this surge was primarily due to the lack of a liquidity pool and short-term market FOMO, BendDAO quickly became the focus of the market.

The crypto community buzzed with comments like, "The NFT lending market finally has a strong player," referring to BendDAO as the AAVE of the NFT world, and calling it the NFT bank.

From a business logic perspective, for sellers, blue-chip NFT holders/sellers/borrowers can list their NFTs as collateral assets to instantly obtain 40% of the NFT floor price in liquid funds. When borrowers deposit NFTs into BendDAO, a boundNFT is minted as a debt NFT. The boundNFT has the same metadata and token ID as the original NFT you own, meaning you can use the boundNFT in your wallet, and no one can steal your boundNFT because it is non-transferable and non-usable.

For buyers, it can be understood as a down payment for NFTs. Buyers can pay a minimum of 60% of the actual price as a down payment to purchase blue-chip NFTs, while using AAVE flash loans to cover the remaining amount. The amount borrowed through flash loans will be repaid through NFT loans on BendDAO. Buyers will automatically become borrowers and pay the down payment, while borrowers can also list their collateralized NFTs for sale.

At the same time, the official set a 7-day time lock for all boundNFT protocol contracts and a 24-hour time lock for all BendDAO lending protocol contracts.

Whether based on marketing or product aspects, BendDAO received positive market feedback after its launch. In a booming NFT market, holders leveraged as much as possible, not wanting to miss any potential liquidity, making BendDAO a hot commodity for blue-chip holders.

On April 24, BendDAO tweeted that its contract address had become the largest holding address for MAYC and the fifth largest holding address for BAYC. BendDAO had a total of 496 NFTs collateralized, mainly holding MAYC (187) and BAYC (133), with their collateral values accounting for 22.5% and 60.2% of the total NFT collateral value, respectively. On May 5, just 46 days after BendDAO's launch, the total locked value of the protocol exceeded 100,000 ETH (approximately $294 million at the time).

Since then, with the significant decline in the cryptocurrency market, the USDT-based market value of NFTs has sharply dropped, leading to a double whammy for the NFT market, with participants rushing to exit. This has resulted in very few investors willing to take over, causing BendDAO to face a liquidity crisis.

As for whether BendDAO can successfully navigate this crisis, it remains uncertain. However, a bear market is a good time to test whether a product is a necessity and whether the protocol design is effective or flawed. Through BendDAO, we can also observe how the integration of NFTs and DeFi should proceed.