Nearly $55 million worth of NFTs ready to be liquidated, but none of them find a buyer… The BendDAO protocol is facing a severe lack of liquidity in the market for non-fungible tokens (NFTs) and may have to close down.
55 million dollars of NFTs ready to be liquidated
The non-fungible token (NFT) market is currently at a standstill. Any moment now, several dozen holders of NFTs from the largest Ethereum (ETH) collections could be liquidated. Specifically, 30300 ETH (or about $50 million) are at stake in this case.
Before anything else, a question must surely be on your mind: how could an NFT be liquidated? To understand this, we need to look at BendDAO. This protocol allows for instant Ether loans of up to 85% of the floor price of the NFT deposited as collateral.
As with any decentralized lending protocol, these loans are subject to liquidation. If the floor price of the collection falls below the amount borrowed by the user, then the BendDAO protocol proceeds to a liquidation of the NFT.
It is for this exact reason that the market is currently under threat. The main collections of NFTs – including BAYC, Cryptopunks and Azuki – have lost so much popularity that their floor prices have recently plummeted. In other words, if this trend continues, several hundred NFTs are likely to be liquidated.
BendDAO admits to being in great danger
Recently, some Internet users have pointed out the bad situation in which BendDAO is currently located. Indeed, the protocol would currently face the problem of illiquidity of the NFTs market and would not be able to pay back its lenders.
Specifically, out of the thousand NFTs deposited on BendDAO as collateral, nearly 10% are in a liquidation zone. However, the protocol faces a major problem: NFTs placed in liquidation do not receive any purchase offers. In other words, it is impossible to recover the cash associated with them.
Indeed, when the floor price of the collection falls below the amount borrowed by the user, then the NFT is automatically placed on auction for 48 hours. Unfortunately, even when they are sold off, they do not find buyers, putting the protocol in an uncomfortable situation.
As a result, users who placed their Ethers in the protocol, to benefit from the very attractive returns, can no longer withdraw their funds from the protocol. While this should represent 15,000 wETH in total, only 12.5 wETH remain in the contract.
Moreover, it is the borrowers who find themselves in the most complex situation. The lack of liquidity has led to a drastic increase in interest rates, now reaching more than 100% of the borrowed value. With such high values, borrowers have no interest in paying back their positions and prefer to abandon their NFTs.
An emergency proposal to save itself?
In the wake of this, the developers of BendDAO have published a statement in which they propose emergency measures to save the protocol. This one begins as follows:
“We are sorry that we underestimated the illiquidity of NFTs in a bear market when defining the initial parameters of the protocol.”
The first proposal would be to lower the maximum borrowing threshold to 70% of the collateral value, down from 85% in the current system. This would lead to healthier and less risky positions. Second, the developers want to reduce the period during which liquidating NFTs are auctioned from 48 hours to just 4 hours.
Finally, the protocol wants to remove the rule that stipulated that bids made during this auction period could not be lower than 95% of the floor price of the corresponding NFT collection. A proposal that means that the protocol is ready to sell the NFTs of its users in order to recover liquidity.
In conclusion, the fall of the NFTs market has initiated a downward spiral that has completely defeated the system on which BendDAO was based, dragging in its fall lenders looking for too attractive returns.
