The faulty auction mechanism raised the dark side of allowing people to borrow against their NFT Bored Apes.
NFT mortgaged crypto lending platform BendDAO returned to normal on Monday after experiencing a disastrous liquidity crisis over the weekend with the pitfalls of allowing people to Borrow cryptocurrency against their Bored Apes NFTs.
BendDAO has a classic banking model: Some customers deposit money into a decentralized finance (DeFi) platform that will lend money, helping depositors cut interest payments. Those loans are backed by collateral but with something extraordinary. It’s collateral that’s images of monkeys, pixelated heads, and expensive NFTs.
Over the past few days, depositors feared that lenders would fail to withdraw assets repeatedly, triggering a meltdown in BendDAO’s reserves to a Sunday low of 5 ether (ETH) from over 10,000 ETH. That comes after dozens of BendDAO loans were in the danger zone late last week, meaning NFTs held as collateral is at risk of being liquidated.
The pressure eased somewhat on Monday as some depositors returned to the platform and other borrowers repaid their NFT-backed loans.
BendDAO tries to protect itself from default borrowers by auctioning its NFT collateral for ETH. Information from Nikolai Yakovenko, who runs the NFT pricing website DeepNFTValue. That way, the protocol will be able to return the funds to the depositor.
Trouble comes when no one is willing to pay bendDAO’s price. This unit was left with the prospect of holding a highly illiquid JPEG instead of the ETH it needed.