Dialogue with BendDAO Co-founder: Our Review and Reflection on the Liquidity Crisis
Looking back now, did the market overreact to this liquidity crisis?Interview: Nianqing, ChainCatcher
Interviewee: Crylipto, Co-founder of BendDAO
A little over a month ago, the continuous decline in the floor price of Bored Apes directly triggered a series of liquidations on BendDAO, the NFT collateral lending protocol with the largest number of Bored Apes listed. When terms like "death spiral" and "liquidity crisis" emerged, people who had been traumatized by the UST/LUNA incident fell into panic again. In just a few days, nearly 20,000 ETH in liquidity in the BendDAO lending pool was almost drained.
This liquidity crisis further sparked discussions about the pessimism surrounding the NFT finance sector. Voices such as "NFTFi can't function in a bear market" and "NFT lending is a false demand" became rampant, with some even suggesting that it was the fuse for the collapse of the NFT market. Looking back now, did the market's reaction to this liquidity crisis become overstimulated? Can NFT lending really survive this bear market?
ChainCatcher recently interviewed Crylipto, co-founder of BendDAO, who reviewed the entire event from an internal perspective, the role BendDAO plays in the NFT market, and the actual demand that NFT lending is addressing.
In the interview, Crylipto mentioned that some short-term market factors, such as the Ethereum merge, are easily overlooked but are very critical; project teams indeed need to have such sensitivity. However, for BendDAO, this liquidity crisis also served as a valuable stress test.
Crylipto believes that for a truly decentralized platform, the situation faced during a liquidity crisis is different from that of CeFi. While CeFi may have unseen funding loopholes or misappropriations, in a decentralized market, the worst outcome of a death spiral triggered by negative sentiment is that the pool is empty, which has relatively limited impact.
Currently, BendDAO's total liquidity in the lending pool is 51,574 ETH, with available liquidity at 38,059 ETH. The ETH Deposit APR is 5.46%, and the fund utilization rate is 26.21%. The platform currently supports eight blue-chip NFT projects, including BAYC (300), CryptoPunks (46), MAYC (247), Azuki (193), Moonbirds (2), CloneX (123), Doodles (8), and Space Doodles (8).
The following is the full interview:
1. ChainCatcher: Please briefly introduce the development history of BendDAO.
Crylipto: Around July and August last year, NFTs began to replace DeFi and GameFi as a trend and hotspot in the market. At that time, we also participated in the NFT craze of BAYC and CryptoPunks, buying and holding them, and have been following the development of NFTs since then. During the buying and selling process, we started to realize the importance of liquidity for NFT trading.
Around the same time, my co-founder and I began to think about the liquidity issue of NFTs. We mainly examined three directions: first, the very popular method of NFT fragmentation at that time; second, NFT lending; and third, NFT options and derivatives. Ultimately, we chose the NFT lending direction, referencing AAVE's Bonding Curve model, which established the development direction of BendDAO.
2. ChainCatcher: BendDAO officially launched at the beginning of this year and has quickly become one of the leading projects in NFT lending. How did the team accumulate traffic in such a short time?
Crylipto: In hindsight, the logic seems simple, but beforehand, the team wasn't very certain (whether it would succeed). We conducted extensive market analysis, and many small lending platforms had already emerged, mostly in a peer-to-peer model. However, experiences from GameFi and DeFi taught us that the efficiency of on-chain lending is crucial, so we ultimately chose the pool model (P-2-Pool). Therefore, the choice of market direction in the early stages of the project was very important.
Secondly, we are very close to the community; team members are holders of BAYC and CryptoPunks, so we share and communicate product experiences with the community.
Thirdly, BendDAO is not a new team; we have a lot of experience in product development, so we put a lot of effort into product experience and security.
Additionally, I think we were fortunate to launch the product before the Bored Ape land (Otherside) airdrop. Many Bored Ape holders sought to purchase more Bored Apes to claim the airdrop.
3. ChainCatcher: In late August, BendDAO faced a liquidity crisis due to the cooling of the NFT market and the decline in the BAYC floor price, but the community and team reacted quickly during this crisis. Looking back now, what experiences and lessons can be drawn from this event?
Crylipto: This situation is quite interesting. Before the liquidity crisis, we were aware that BendDAO is a two-sided market that needs to balance demand, one side being NFT holders and the other being ETH liquidity providers. However, BendDAO early on was more inclined towards NFT holders. For example, the "48-hour liquidation protection" set in the previous BendDAO liquidation mechanism, the requirement that "the liquidator's bid must exceed 95% of the floor price during auctions," and "greater than the total accumulated debt" were all measures taken from the perspective of NFT holders to ensure they wouldn't suddenly find their "beloved avatars" gone after a night's sleep.
Through this event, we realized the need to balance the demands of the two-sided market, such as adjusting the liquidation threshold from 90% to the current 80%, removing the 95% floor price and first bid restrictions. This not only optimized the liquidation mechanism but also adjusted the staking interest rate to 10% and raised the first inflection point of the interest rate curve. More importantly, we realized that BendDAO is essentially an interest rate tool for the NFT market, and liquidity can be reasonably adjusted by interest rates.
Additionally, there was a key time point during this event, which was the Ethereum merge. The market had a short-term appreciation expectation for ETH and airdrop expectation before September 15, leading some users to choose to withdraw part of their staked ETH liquidity to their wallets to claim the airdrop. Later, when the team analyzed the data, they found that approximately 234 ETH in liquidity withdrawal during NFT liquidation auctions triggered panic, ultimately leading to about 20,000 ETH in liquidity being "scared" away. This illustrates the asymmetry of market information.
From our perspective, however, the liquidity crisis is temporary; after the short-term emotional fluctuations, the crisis will naturally dissipate. There are two reasons: first, DeFi projects are inherently decentralized and transparent; the assets themselves are stored within contracts, and there are no hidden funding loopholes or misappropriations as in CeFi; second, the appreciation expectation of collateral assets still exists. The appreciation expectation of assets is directly linked to the quality of the assets, which is why we chose blue-chip NFT projects from the start, as the fundamentals of these assets are sound.
In summary, we have a few experiences: first, lending protocols essentially match ETH liquidity providers with NFT holders, and there is indeed a strong demand in the market; in this process, efficiency is paramount; second, safety is the most important; as long as a protocol is safe, its value will be rediscovered by the market; third, it is inevitable to encounter event-driven short-term fluctuations in the market, and project teams need to be prepared for early identification or prevention. For example, before the Ethereum merge, AAVE also took some emergency measures (reducing ETH borrowing limits, increasing Ethereum borrowing rates, etc.).
4. ChainCatcher: Protocols like JPEG'd have set up a priority liquidation mechanism for DAO treasuries, where the DAO treasury buys the liquidated NFTs first before disposing of them. BendDAO currently operates under a liquidator mechanism; have you considered diversifying the liquidation mechanism? For instance, involving more DAO participation or introducing third-party liquidators?
Crylipto: Previously, BendDAO was primarily individual participants in liquidations. However, after the last liquidity crisis, some professional liquidation institutions have actively contacted us and participated. Of course, it is difficult to distinguish between institutional addresses and personal addresses on-chain, making it hard for ordinary users to know.
Additionally, the community has realized that the treasury needs to have some funds reserved for liquidation to support ETH liquidity providers. Based on this starting point, the community began to propose and discuss doing some Token financing, keeping this liquidity in the treasury for auctioning bad assets in emergencies (in late September, the community proposed selling 1 billion BendDAO tokens to raise about $8 million to create an investment fund with a post-investment valuation of $80 million. If approved, this fund would serve as a sub-treasury for NFT lenders, with at least 50% of the funds invested in bad assets). Currently, this proposal is in a state of community promotion and team support, and discussions and revisions are ongoing.
Objectively speaking, community promotion does have certain difficulties. Although many organizations now claim to be "DAOs," in essence, it is still small teams making the decisions behind the scenes. BendDAO hopes to take a substantial step in governance to become a very pure DAO. However, this requires sufficient influence and professionalism from each party among the community, developers, and the market to achieve a balance among the three.
Of course, there will be some unreasonable and inefficient situations during this process, but this kind of discussion is the lowest-cost way to grow and is an unavoidable part of community development.
5. ChainCatcher: The roadmap shows that in the fourth quarter, BendDAO plans to build P2P lending and private lending pools. What considerations are behind these proposals?
Crylipto: BendDAO's goal is to improve NFT liquidity. Our slogan is "Web3 data liquidity." To get closer to this goal, we need to continue deepening our efforts. Currently, we have only optimized the liquidity of blue-chip NFTs, which is far from enough, as blue-chip projects only account for a minority. Therefore, to accommodate the liquidity of long-tail NFTs, we plan to build P2P lending and private lending pools in the future.
6. ChainCatcher: How do you view the various models in the NFTFi space, such as Peer to Peer, Peer to Pool, and AMM models?
Crylipto: Macroscopically, each model has its own demand space and use cases. NFTFi is still in its early stages, and everyone is exploring different directions, but ultimately, it is all about improving the demand for NFT liquidity. I believe that at least for now, there is no definitive conclusion on which is superior; it’s just that there are some horizontal and vertical comparisons.
For example, in terms of funding efficiency, the pool model has the highest efficiency because it does not require waiting for a match between the lending parties. However, in terms of covering NFT categories, especially non-blue-chip assets, the peer-to-peer model has a stronger advantage because the lending parties negotiate rates and assess risks as needed, with the platform only acting as a matchmaker, although the efficiency is relatively lower.
The AMM model actually balances efficiency and long-tail NFTs, but it currently lacks differentiation in asset rarity because it artificially groups NFTs of different rarities together and places them in the same Curve. This model has not done enough for the segmented pricing of market assets.
Each method has its advantages and disadvantages, and NFTFi will continue to evolve. I believe that each party will launch better iterative solutions based on their foundations. This is also the most attractive aspect of the market.
7. ChainCatcher: What is BendDAO's current strategic focus? What are the long-term development plans?
Crylipto: Currently, the team is particularly focused on the rights of NFT holders, how to ensure that they can enjoy airdrop and whitelist rights while collateralizing NFTs. For example, we are recently trying out the Bend-Ape Staking product, which is an innovative strategy for us.
In terms of long-term development planning, in addition to continuously improving NFT liquidity, BendDAO also hopes to contribute to the practicality of NFTs (NFT Utility) and the creator economy, rather than just making NFTs a financial trading asset.
8. ChainCatcher: There is a viewpoint that NFT-Fi essentially adds a set of leverage to NFTs, which can enhance liquidity in a bull market but may face liquidity shortages in a cooling market. Some even consider NFT-Fi to be a false demand. How do you view such opinions?
Crylipto: You can actually see the real needs of users very clearly on BendDAO, and the term "false demand" is self-defeating. We have always emphasized that BendDAO currently only addresses half of the liquidity demand, especially compensating for the liquidity shortage on OpenSea, participating in NFT trading through the lending pool model, and releasing more ETH. However, once NFTs are transferred to BendDAO, they also face liquidity issues during auctions. The team is currently optimizing this part of the liquidity and will have further plans in the future to better complete an NFT liquidity loop.
From the overall perspective of NFTFi, NFTs, as on-chain assets, are very close to real estate, possessing both practicality and financiality. The NFT lending pool model has a value somewhat similar to that of the Federal Reserve to the entire financial industry. The Federal Reserve can control the liquidity of money through interest rates, influencing macro market demand and thus driving innovation across the industry.
What BendDAO is doing is somewhat like a miniature interest rate tool platform, releasing liquidity through interest rate tools and further stimulating the creator economy and NFT demand, which is very objective. Since the Federal Reserve detached from the Bretton Woods system and began to autonomously regulate credit currency, waves of technological innovation in the United States have followed, all validated by the market.
9. ChainCatcher: In what aspects is the scarcity of NFT infrastructure currently reflected?
Crylipto: We can view NFTs as a form of user embodiment on-chain, whether it’s avatars, GameFi NFTs, or Passes. In the early days, users were just "an address + the balance under that address," i.e., Token as a Balance. This form is very abstract; we cannot know whether the address behind it belongs to a robot or a person. However, when on-chain addresses start to have NFTs, we can discover a person's aesthetic through these small images, and even infer that a user is an OG by looking at their purchases of Punks and Apes.
This is similar to the early development of the internet, where there was a joke that "you don't know if the person you're chatting with is a human or a dog," because everyone was in an anonymous or semi-anonymous state. It wasn't until avatars, statuses, signatures, personal spaces, and information walls appeared that we could see whether the person on the other side was a beautiful girl or a foot-scratching man. Now, it has evolved towards real-name identification. Therefore, NFTs are also assisting users behind the blockchain network to develop in this direction, which aligns with human social needs. SocialFi, GameFi, and others are all moving in this direction, but the network needs to have the capacity to support people's social needs.
Steve Jobs once said in an early interview, "The current bandwidth is not enough to convey emotions; to convey emotions, you need more bandwidth. Most people do not have such high-speed bandwidth, and most of the content online is also emotionless." From this perspective, the infrastructure for NFTs needs to allow everyone to present their on-chain persona in the blockchain network. Vitalik once proposed Soulbound Tokens; in this context, Token as a Balance would transform into NFT/Token as a Service, allowing NFTs to serve as a means to record on-chain activities.
This requires NFTs to have strong interactivity and the ability to express personality, which places additional demands on the underlying infrastructure, and the current blockchain is still far from meeting these needs. Take Ethereum, for example; NFTs are passively bound to on-chain addresses as static image resource files through interfaces. However, any input related to this small image is not accepted on-chain and will be ignored. The fundamental reason is that the chain cannot accommodate these interactive demands at the lowest cost and needs further evolution. Currently, new public chains like Aptos and Sui using the Move language have already considered the interactivity of NFTs.
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