BendDAO, a platform for crypto loans backed by NFTs, was trying to get back on its feet on Monday after a near-catastrophic liquidity crisis over the weekend. This showed the risks of letting people borrow crypto money against their Bored Apes.

From a distance, BendDAO looks like an old-fashioned bank: Some customers put money into the decentralized finance (DeFi) platform, which then loans the money out and gives the depositors a share of the interest payments. These loans are backed by collateral, but there’s a crypto-twist: the collateral is pictures of monkeys, pixelated heads, and other expensive, non-fungible tokens (NFTs).
Over the past few days, depositors who were worried that the lender would fail pulled out all of their money at once. This caused a bank run that drained BendDAO’s reserves to a low of five wrapped ether (ETH) on Sunday, down from more than 10,000 wrapped ETH. This happened because at the end of last week, dozens of BendDAO loans were in the platform’s danger zone, which meant that the NFTs used as collateral were in danger of being liquidated.

Monday, some depositors came back to the platform and other borrowers paid back their NFT-backed loans, which helped ease some of the pressure. This short-term relief gave BendDAO’s community time to figure out how to fix the broken liquidation rules that led to DeFi’s latest lending drama. Now, they are going to vote on a set of changes to how BendDAO works.
BendDAO tries to protect itself from borrowers who don’t pay back their loans by selling their NFT collateral for ETH at auction. It is hard-coded to accept “only bids that make the DAO whole,” said Nikolai Yakovenko, who runs the NFT price website DeepNFTValue. So, the protocol will be able to pay back people who put money into it.

When no one is willing to bid at BendDAO’s prices, trouble starts to happen. This weekend, crashing NFT markets and worries about locking up assets in BendDAO’s two-day auction window were bad. Instead of the ETH it needed, BendDAO was left with the possibility of holding ape JPEGs, which are very hard to sell.

Yakovenko said, “They pretty much don’t let the DAO be used in any way at all.” “They don’t let the DAO lose money on anything, so they end up losing money on everything.”

What’s next?

“We are sorry that when we set the initial parameters, we didn’t realize how hard it could be to sell NFTs in a bear market,” BendDAO participants wrote in a proposal to change how the protocol works and “build confidence” among ETH depositors.

With the proposed changes, BendDAO would gradually lower the liquidity threshold from 95% to 70%, shorten the time it takes to liquidate from two days to four hours, and raise interest rates to encourage more ETH deposits and repayments.

The 48-hour amnesty program at BendDAO gives people time to save their NFT by paying back the loan and a fine. This “liquidation protection” worked against the protocol in the end, because bidders didn’t want to lock up their assets in an auction where the borrower could take back their NFT or, even worse, make them pay for an asset that had dropped in value.

Monday afternoon, holders of BendDAO’s native governance token, BEND, voted overwhelmingly in favor of the proposal. This shows that the motion is likely to pass and go into effect Tuesday morning.

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