Decentralized peer-to-pool NFT lending protocol BendDAO has proposed several key changes, including revising liquidity threshold, auction period, and base interest rate, in a bid to avoid an impending credit crisis.
BendDAO, which lends ETH to borrowers using NFTs as collaterals, is in a rough spot. The protocol currently gives out loans up to 40% of an asset’s floor price in ETH. Depositors receive a certain amount of interest for enabling these loans.
Last week, dozens of NFTs fell to the platform’s danger zone after the floor prices of the assets dropped significantly. At a certain threshold, the assets are automatically liquidated through an auction.
Fearing a collapse, depositors tried to withdraw their assets in mass, leading to a bank run that brought down the protocol’s reserves to a low of 5 ETH on Sunday from over 10,000 ETH.
According to Etherscan, the DAO’s reserve has recovered to some extent and holds about 650 ETH, at press time.
The problem for the DAO is evidently the way the auction works. Liquidated assets fail to attract any bids because of the high threshold – used to protect the DAO’s interest to accept any loss.
“We are sorry that we underestimated how illiquid NFTs could be in a bear market when setting the initial parameters,” wrote one of the co-founders, codeincoffee, in the community forum.
As a result, the DAO has proposed specific policy changes. Currently, the auction threshold for liquidated assets is at 95% of the prevailing floor price. The proposal wants to update it to 85% for now, ultimately bringing it down to 70% by Sept 20.
Other proposed changes include:
- Revising the auction period to 4 hours from 48 hours.
- Adjusting the base interest rate to 20%.
- Creating a voting mechanism to deal with bad debt.
At the time of writing, the proposal had received an overwhelming number of votes in favor, signaling it’s all set to pass.