How Bored Ape Ethereum Lender BendDAO Almost Failed

As NFTs from the bustling Bored Apes Yacht Club (BAYC) began hitting six figures last year, new lending markets have emerged offering liquid collateral in the form of Ethereum to BAYC owners who staked their monkeys as collateral.

But for one such lending platform, BendDAO, that experiment turned sour last week, as the market value of BAYC and other top NFT collections – which skeptics consider little more than pictures JPEG – fell sharply. Today, the decentralized platform holds a large stock of rapidly depreciating NFTs that it struggles to sell as owners default on their loans.

” I do not think so [NFT lending] was wrong – I just think the lending platform was horribly set up for a situation like this,” said Cirrus, a pseudonymous NFT trader. Fortune. He sounded the alarm on August 17 about a potential NFT liquidation stunt worth $59 million – the first of its kind for NFTs, but common for cryptocurrencies. “People are also less willing to splurge on JPEGs in times of macro uncertainty,” he said.

BAYC’s collapse also led to something of a bank run on Sunday as loan providers withdrew their funds from the platform, pushing BendDAO’s total wallet holdings to 10,000 ETH (16.5 million) to 5 ETH ($8,000). Since then, the platform’s balance has rebounded to 7,479 ETH ($12.3 million), as borrowers rush to save their risk-of-default NFT collateral and willing buyers finally show up. to snag discounted NFTs. For now, the insolvency crisis has been averted.

But what led to BendDAO’s collapse in the first place?

It helps to know that on the surface, BendDAO works like an automated cooperative-owned digital bank. The platform accepts Ether (ETH) deposits from interest-seeking lenders and lends ETH from this pool to borrowers. Borrowers must lock an NFT as collateral in the platform’s digital vaults. If someone doesn’t repay their loan, the lending pool will automatically repossess the NFT, auction it off, and pay back their pool of depositors — or at least that’s how it’s supposed to work.

Since its inception in March, the platform has lent 56,000 ETH (about $929 million) to NFT holders. It was particularly popular among BAYC holders: 272 Bored Apes, or 3% of the collection of 10,000, were guaranteed through the platform. Some use the unlocked cash to purchase real-world assets, while others make strategic crypto bets. Franklin, who holds 59 NFT BAYCs and only goes by his first name, said Fortune he used BendDAO to “return more monkeys, basically by doubling down or taking advantage”. He took out 10,000 ETH ($16.5 million) in repeat loans from BendDAO, with no outstanding debt.

The platform’s strict set of rules, such as high minimum bid requirements for those willing to accept collateral as well as a 48-hour freeze on bidders’ ETH, initially deterred prolific NFT traders like Cirrus. to participate. “[That] exposes you to the risk of burning yourself if the [market value of NFTs] continues to decline during this period,” he said.

BendDAO’s pseudonymous co-founder CodeInCoffee on Monday appeared to acknowledge issues with the site’s incentive structures, saying, “We’re sorry we underestimated how illiquid NFTs could be in a bear market during setting the initial parameters.”

CodeInCoffee also presented a successful proposal to increase liquidity on the platform by lowering bidding requirements and shortening lock-up periods.

Designing for fungible vs. non-fungible

Although the situation is now largely contained – even if it has left a bad taste in the mouths of its lenders and borrowers – the whole experience has highlighted a fundamental distinction in the crypto industry.

“NFTs are fundamentally different from fungible tokens [or cryptocurrencies]and financial products serving NFTs must capture the nuances of the underlying assets,” said Connor Moore, co-founder of NFT liquidity scaling platform MetaStreet. Fortune.

BendDAO’s peer-to-peer lending is a flawed model for NFTs, he explained, “due to the critical assumption that liquidations will occur quickly and at a specified value – true for liquid markets and false for illiquid markets.

Moore pointed out that at the height of the BAYC liquidation crisis on August 21, BendDAO held 241 Bored Apes in its debt pool, which translates to approximately $20 million in loan exposure. This equates to 2,000% of BAYC’s daily spot trading volume of $1 million.

In contrast, he explained, the loan exposure of the largest peer-to-pool ETH lender MakerDAO on March 12, 2020, when the crypto market crashed due to Covid-19 fears. 19, was less than 2% of daily ETH volume.

“The correct basic building block for NFT loans is in a peer-to-peer format, with the borrower and lender agreeing on loan terms before creating the loan,” Moore concludes. “These building blocks can then be combined, abstracted, scaled and bundled into entirely new debt products.”

But the peer-to-pool structure isn’t necessarily the problem, according to Alex Ho, product manager at lending platform NFT Pine, which runs separate lending pools set up by lenders with their own lending terms. . BendDAO, he said, operates a co-ed pool that socializes losses among all depositors.

Gabe Frank, co-founder of peer-to-peer NFT lending platform Arcade, told Fortune that BendDAO “has built a product that market participants have found useful: DeFi vs. NFT lending. The design choice was simply wrong. There has always been this risk for lenders in a peer-to-pool model.

“It was an experience that didn’t end well,” he said.

Ekin Genç is a freelance journalist whose work has appeared in publications such as VICE, Decrypt, and CoinDesk.

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