Since the liquidity of the NFT has a significant effect on its value, several projects have been launched recently to solve this problem. BendDAO is one of these projects.
Most of our readers should be familiar with the concept of a decentralized autonomous organization (DAO). However, for the sake of those that are not, decentralized autonomous organizations are online communities (with no central authority) built on the blockchain in which members operate in the group’s interest.
DAOs are legal entities in a few places like Wyoming (USA) and the Republic of the Marshall Islands. Members of the communities have a say in how such communities are run. People can participate as investors and join the communities by purchasing their cryptocurrency tokens.
An example of such a community is BendDAO. In this community, users pool their Ethereum to lend to one another in exchange for a percentage of the interest paid on loans secured by NFTs.
This guide explores what BendDAO is and how it works.
What is BendDAO?
BendDAO is the first peer-to-pool-based NFT liquidity protocol. Community members that have NFTs can use BendDAO to borrow ETH by pledging their NFT assets as collateral. BendDAO aims to become an all-in-one solution for NFT liquidity by making it easier to make initial deposits, borrow, and list.
While other projects seek to break up NFTs, BendDAO is the first to allow users to instantly use NFTs as collateral to borrow ETH from the lending pool.
Bluechip NFT collections, including BAYC, Azuki, MAYC, CryptoPunks, etc., are the primary ones supported by BendDAO to guarantee value and liquidity.
Benefits of BendDAO to the NFT Community
Equal Rights
Borrowers are treated equally since owners of blue-chip NFT collections will receive regular airdrops. As the NFTs of the borrowers are added to the collateral pool, BendDAO will collect airdrops and give them to the borrowers.
Unstealable NFTs
Since NFTs will be turned into ERC-721 boundNFTs, which will be used to represent NFT loans, they can never be stolen. These boundNFTs may be transferred, making them secure from theft. Additionally, Web2 social sites that allow NFT avatars can make use of boundNFT as well.
Protection From Liquidation Risk
The NFT market is prone to liquidity issues, which in turn cause price volatility. BendDAO lets borrowers pay back their loans early, typically within 48 hours, so lenders don’t lose money.
How Does BendDAO Work?
BendDAO is a decentralized credit protocol that is powered by NFTs. Users can act as either lenders or borrowers in this system. Lenders deposit ether into the Lending Pool in exchange for a passive income, and borrowers can obtain loans of ether from the Lending Pool. So, NFTs are used as loan collateral. Borrowing limits for the NFT collection usually are between 30% and 40% of the floor price.
As stated earlier, the high value of NFT holdings can be used as collateral for loans in this project. Approval for a loan at this level would be equal to around 40% of the NFT floor price pledged as collateral.
Therefore, in the case of an NFT with a floor price of 17 ETH, the borrower would be eligible for a loan of up to 6.8 ETH. Borrowers are also allowed to liquidate (sell) their stake if the NFT’s floor price drops below a specific threshold.
Investors in BendDAO are rewarded with interest-bearing tokens called bendETH, each of which is equivalent in value to an ETH token. The DAO promises its investors a return of 77.54% each year, which is split as follows: 73% in ETH and 4.53% in BEND (the DAO’s native currency).
The DAO’s high-interest rate of 93.96% is designed to reward its lenders, but with the price of Ethereum on the rise, it discourages borrowers from repaying their debts.
If the debtor cannot repay the loan, the NFT will be sold at auction for more than the outstanding balance, usually at least 95% of the collection’s floor price. Borrowers have 48 hours to redeem their NFTs before the DAO liquidates them. All bids placed during this period would be locked away. This poses a significant threat to bidders, especially for large debts.
Features of BendDAO
NFT-Backed Loans
NFT holders can access a pool of depositors who offer liquidity in exchange for interest payments. This is BendDAO’s primary product, and it allows customers to use their trades of NFTs to make more money.
Collateral Listing
Sellers or owners can earn up to 40% of the floor price. The quick NFT-backed loans facilitate this immediate access to funds. After the sale is finalized, the buyer will pay back the loan and any interest that has built up.
Minimum Down Payment of 60%
Depending on the actual price, buyers can put down as little as 60% and then get a flash loan from AAVE to cover the remaining 40% to buy blue-chip NFTs from major NFT exchanges. The fast NFT-backed loan on BendDAO will be used to repay the borrowed amount. In this case, the buyer also takes on the role of borrower.
Problems with BendDAO’s Operations
According to a statement from the BendDAO team, the team has highlighted the fundamental flaw in the system; “…we underestimated how illiquid NFTs could be in a bear market when setting the initial parameters.” The borrowers aren’t paying back their loans, and nobody is bidding on the NFTs at auction since the prices are too high.
These inflated rates are designed to pay off the borrower’s debt, but they often exceed what individuals are willing to pay to keep their ETH in cold storage, especially taking into account the possibility that the floor prices of those NFTs will decline during the lock-in period of 48 hours.
The fact that BendDAO is unwilling to assume any of its debt is still another flaw in its operation. This means that it will not settle for an offer that is less than what it has determined is necessary to repay the lenders. Their DAO is in a tight corner because no NFTs are selling since they refuse to deal with the bad debt themselves.
Many popular NFT initiatives have their value pegged to these auctions; examples include Azuki, CryptoPunks, Bored Apes, and Clone X. BendDAO will have to lower the cost to attract buyers since no one is bidding at the asking price. As a result, the market value of NFTs (and the projects they support) keeps decreasing.
The Way Out
BendDAO planned to reduce the liquidation threshold from 85% to 70%. In addition, it planned to cut the liquidation protection window in half, from 48 hours to just four hours, which should, theoretically, shorten the lock-in period for bidders. Interest rates have been reduced to 20% as well.
The NFT community as a whole must wait and observe how these changes will influence NFT projects. It’s unlikely that NFTs will go away soon, given how many people use them and how passionately some groups support them.
BendDAO Governance Mechanism
The ‘DAO’ in BendDAO suggests the need for a governing structure for the protocol. Snapshot Space serves as the governance mechanism for the BendDAO NFT liquidity protocol. The BEND token is used on the forum to vote on the Bend Improvement Proposals that aim to improve the protocol.
Interestingly, the governance mechanism was designed to guarantee in-depth debate on proposals before transferring them to on-chain implementations.
The BEND token’s relevance to governance is also demonstrated by the ease with which votes can be delegated to Bend protocol politicians. Community members could appoint someone else to cast their ballots for them.
In Conclusion
- BendDAO has not only solved liquidity issues, but it has also prevented the NFT sector from collapsing. To avoid diluting their holdings, owners of non-fungible tokens do not need to fractionalize them to achieve the required level of liquidity. BendDAO protocol users are “stuck” in a profitable cycle of borrowing and lending.
- BendDAO gives community members access to quick NFT-backed loans, NFT down payment, and collateral listing. This implies that one can purchase an NFT with a flash loan and a minimum down payment of 60%. Sellers, just like buyers, may use NFTs as collateral when applying for loans. The timely repayment of loans is the primary accomplishment of BendDAO’s efforts.
- The future of NFT liquidity may look bright if the Bend protocol is paired with a security risk assessment method and a robust governance structure.
Disclaimer: This article is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.
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