Key Takeaways:

  • Financialisation of NFTs has slowly taken off this year and leverage has been inking into the NFT space
  • While not extreme in terms of liquidation cascades, BendDAO crisis is a classic situation that emphasizes the risks of financialising volatile assets like NFT’s
  • Swift actions by the team and approved DAO proposals has salvaged the situation and taken the protocol to safety, but investors will maintain their caution when dealing with peer-to-pool NFT lending protocols


From the initial Luna chaos to subsequent 3AC liquidation mayhem, crypto markets have been subjected to a tumultuous period of uncertainty and drawdowns over the past 6 months. While these contagion effects have affected the overall markets, NFTs seemed to have no major large-scale liquidation events due to the minimal leverage in the sector, until of recent.

The BendDAO liquidations have been a highly discussed topic in terms of the overall health of markets over the past week. The depreciation of floor prices in the past 3 months has allowed the unfolding of liquidations of many loans all at once, causing panic and hysteria among participants expecting an impending liquidity cascade that will eventually doom NFT markets.

This article aims to provide a glimpse of the inner workings of BendDAO, the issues faced by the protocol and the eventual solution that resolved the issued.

Why NFT collateralisation has become so huge?

Financialisation of NFTs has been in development since 2020 but has only taken off among the higher echelons of NFT holders in recent months. It combines NFT’s and DeFi, 2 of the biggest trends and darlings of the past bull market, to allow NFT holders to put idle NFT’s to work.

NFTfi, one of the most popular peer-to-peer NFT collateralized lending marketplaces has seen unprecedented volumes in April and May this year, which just goes to show the importance holders are placing on immediate capital liquidity.

NFT Loan Volumes in NFTfi (Source: Dune Analytics rchen8)

The idea is simple — holders of bluechip NFTs provide their NFTs as collateral and borrow a % of their value in ETH with interest. This capital is then deployed for other purposes without selling their NFTs. Once the holder repays the loan, the NFTs are back in the possession of the original holder.

In essence, liquidity on demand without selling their valuable bluechips is the general rationale behind why they have become popular.

Introduction to BendDAO

BendDAO touts itself as the first decentralized peer-to-pool based NFT liquidity protocol which allows users to use NFTs as collateral to borrow ETH or deposit ETH to earn yields instantly. Their main 3 flagship features include instant NFT-backed loans, Collateral listing, and NFT down payment.

BendDAO has gained significant traction over the past few months since its launch in late march, along with the overall NFT collateralizations market. So far, the platform has been a mediator of 56,000 ETH in loans, which goes to show the popularity and trend it has set among some participants. At its peak in May, the protocol had a staggering 316 Bored Apes, 396 Mutant Apes, and 50 Cryptopunks as collateral for various loans.

Bend Loan & Repayments in ETH (Source: Dune Analytics, cgq0123)

This next section will go through the inner working of BendDAO. If you are familiar with how NFT lending works, please proceed to the liquidation process of the article.


For the uninitiated, since BendDAO is a peer-to-pool lending platform, lenders provide ETH to the pool in exchange for rewards. This lent ETH allows bluechip NFT holders to obtain loans by collateralizing their NFTs on the platform. The current loan terms that are provided by BendDAO for NFT borrowers are as follows:

  • Cryptopunks & BAYC receive 40% LTV, other collections receive 30% LTV

In simple terms, this means that the NFT holders can borrow 30–40% of the value of their NFTs, depending on the collection

Repayment of loans

BendDAO borrowers are able to repay their loans whenever they wish to or whenever they are on the verge of being liquidated/margin called. BendDAO uses a ‘health factor’ to calculate the positions at risk and initiates the liquidation process once the health ratio hits below 1.

Health Factor = (Floor Price * Liquidation Threshold) / Debt with Interest

Suppose a Cryptopunk holder with a 100ETH floor price decides to take a 40% loan on it. He receives 40 ETH on BendDAO and proceeds to deploy that borrowed capital elsewhere.

A couple of months later, the floor of Cryptopunks is at 44 ETH

Health factor = (44 * 90%) / (40 + interests) < 1

The holder gets moved through the liquidation process

The Liquidation Process

BendDAO has a unique method of liquidation when the health factor drops below 1 which prevents a series of liquidation cascades. NFT collateral goes through a 48-hour liquidation process where the borrower can repay the loaned amount and anyone interested will be allowed to lock their ETH on the protocol and place a bid that meets the following conditions:

1. Bid has to be more than 95% of the floor price

2. Bid has to be bigger than the total debt of the NFT

Take two of these conditions into mind as both of them are the key reasons why BendDAO was put into this difficult situation.

The Chaos at BendDAO

The bear market has been tough for NFTs. Trading volumes have dried up, interest in NFTs are down tremendously, and floor prices are down. Those who borrowed capital at higher prices a few months are now licking their wounds.

Since the inception of BendDAO, the price of bluechips has steadily been tumbling. Below shows the price action of the NFT’s accepted by the protocol in loans. Most of these NFTs are down 40% since the initiation of the protocol in late March. Special attention to Bored Apes and Mutant Apes which are down 60% and 70% since its peak in April.

This simply means that the borrowers who borrowed ETH by collateralizing their NFT’s have been put into trying circumstances. A loan that was obtained at its peak has already hit the minimum NFT health factor and has instantly been put under the liquidation process.

Fast forward to two weeks ago, multiple NFT’s were on the verge of being liquidated due to the large-scale drop in the NFT prices over the week. This created a perfect scenario for a large amount of NFTs to hit liquidation, which caused some uncertainty among the large-scale community of impending liquidation doom among NFT’s.

As discussed in the liquidation section, the liquidation parameter of the protocol does one thing well — reducing liquidation cascades. Bids by anyone intending to purchase the NFT’s (liquidators) should not be below 95% of the floor price, should cover the debt positions, and most importantly last 48 hours. This creates a sandbag against the destruction of floor prices and a cascade of liquidations following through.

The Problem

While everything is well and good in terms of not having a large-scale crisis in NFT markets, the same 2 parameters and the 48h process had not been providing enough discount for people to place bid on the NFT’s and acting like a double-edged sword. Many of the NFT’s up on auction were not attractive as the end price did not contain much discount over buying on marketplaces, and locking up ETH on the platform for 48hrs is a risk to take on.

This created a cause for concern for the DAO as it would be forced to hold on to the illiquid NFT’s that doesn’t get bid on, leading to a bad debt situation for the protocol. What it also means is that with the illiquid NFTs, it wouldn’t be able to repay the lenders who provided ETH in the first place.

(Source: Etherscan)

We soon saw a run on the bank and ETH reserves of the protocol started to get depleted. From 15,000 ETH in BendDAO contracts on 19 August to less than 80ETH on 21st August, the reserves reduced, while around 14,000 ETH was owed to lenders.

The Solution

The DAO passed emergency measures that has solved the potential bad debt situation for the protocol and has taken it to a safer situation.

Key Gist:

  • Liquidation threshold will be reduced on a week-by-week basis
  • Reduce the Auction period from 48hrs to 4hrs
  • Adjust Interest Interest Base Rate to 20%
  • Remove the first bid limitation of 95% of the floor price

All these proposed steps have increased the number of repayments, improved deposit situations, and ensured that the DAO does not take any bad debts through the process.

Following the proposal, another proposal was passed to make minor changes to the liquidation thresholds and auction durations based on the communities feedback.

Current Situation

Currently, the DAO is conducting a vote to reduce the liquidation threshold from 80% to 75%:

While the proposal has 67% votes against the action with 2 more days to go, if this vote passes, we could see more NFT’s on BendDAO go through the liquidation process in the immediate future.

Regardless of what happens, the widespread crisis has shown the risks of leverage in the NFT systems. Investors will carry much more caution and pessimism, but we believe the NFT financialization market will continue to grow significantly.

Disclamer: None of this information in the article constitutes investment advice. Readers must do their own due diligence processes before investing.

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