Could BendDAO Collapse the NFT Market? Maybe

NFT

BendDAO is a so-called “NFTfi” mission that lets NFT holders borrow ETH once they lock up their belongings. 

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, one in every 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 the moment pays 8.15% APR in ETH and BEND), whereas NFT holders can borrow ETH once they lock up their belongings. In return, collectors get utility on their belongings 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 ground worth. Nonetheless, if the ground worth drops and nears the unique worth of the mortgage, the NFT will 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 generally known as Cirrus took to Crypto Twitter to sound the alarm on BendDAO Wednesday, declaring that $59 million value of NFTs had been deposited to the protocol as collateral (immediately the whole collateral worth is nearer to WHAT) with many vulnerable to liquidation. They mentioned {that a} “terrifying” variety of Bored Ape Yacht Membership NFTs deposited to the protocol have 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 issues stemmed from the concept that they might undercut the ground worth to repay their ETH debt. This might doubtlessly result in a liquidation cascade wherein different apes deposited to BendDAO get offered off at a reduction as the gathering’s ground worth drops (it’s value noting {that a} liquidation cascade might 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 completed little to calm fears. Whereas the NFT market has to this point averted any main liquidation occasions, different areas of the house have been hit exhausting over the previous 12 months due to extreme use of leverage. Probably 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 by means of principally uncollateralized loans. The crypto lender Celsius, whose enterprise mannequin concerned promising prospects profitable yields, was one in every of Three Arrow’s Capital’s collectors, and it additionally went bankrupt because the market collapsed. Moreover 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 concern one other looming liquidity meltdown. 

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