20th August 2022 > > BendDAO.

tl;dr

There is evidence of over-leverage in the NFT (non-fungible tokens) market.

Market Snap

Market Wrap

Ouch.

Here come the naysayers.

Occasional Series – Holiday

With a birthday celebratory weekend in Brighton (not mine), and a lot of travel on Tuesday, the CCC will be back on Wednesday, not before.

Sorry, and all that.

Curious Cryptos’ Commentary – BendDAO

No, not Ben Dover, a filmmaker of ill repute who allegedly owned a fleet of Ferraris from his creative output, but a decentralised platform allowing for leverage of blue-chip NFTs (non-fungible tokens).

Eh, you what?

That was my initial reaction too, but in the crazy world of cryptos, you cannot fault the sheer scale of innovation. So, let’s look and see if it makes any sense.

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The website (https://www.benddao.xyz/) states:

“Web3 gives back the data ownership to users. Bend DAO empowers Web3 data to be liquidity.”

Which is an interesting and enticing prospect, if somewhat clumsily expressed. As you all know, the CCC is a big supporter of the possibilities that decentralisation offers to individuals, through the medium of Web3, not to be confused with Mark Zuckerberg’s vision of the Metaverse (see yesterday’s CCC) and the inevitable presence of giant man-eating caterpillars, for reasons unknown to me.

BendDAO allows owners of the following NFT collections to borrow ETH using their NFT as collateral:

BoredApeYachtClub

CryptoPunks

MutantApeYachtClub

Doodles

Space Doodles

Azuki

CloneX

Before we dig into the mechanics, we need to understand the concept of “floor price”.

The floor price of any NFT collection is defined as the lowest public offer for any single NFT within a collection. Not all NFTs within a collection have the same value – buyers’ desire for an NFT is affected by the rarity of traits within that NFT.

As an example, within the 10,000 CryptoPunks there are 88 Zombie punks, whilst there are only 9 Alien punks. It is one of the latter – which also fortuitously sported a medical face mask long before Covid and the associated governmental over reaction was ever a thing – which sold for the equivalent of $11.75mm.

Note that there are reports of more expensive sales, but doubts have been raised about the veracity of those sales.

What the floor price tells you is the minimum amount needed – expressed in ETH or another crypto – to become an owner of the cheapest one of a specific collection. The current floor price for a CryptoPunk is ETH 65.5, just shy of $110k.

Bargain, do I hear you say?

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Users of BendDAO can provide liquidity by depositing ETH and earning interest, or they can remove liquidity by depositing an NFT, borrowing ETH, and incurring interest on that loan.

Depositing ETH is a simple matter for those familiar with the decentralised finance (DeFi) space.

Connect your MetaMask wallet, and transfer ETH to the liquidity pool. In return for doing so, you will be rewarded with 9.32% APR, split as 6.64% in ETH and 2.68% in BEND, the token native to BendDAO. These rates change algorithmically as liquidity within the pool changes. If you want to see the actual formulas, they are here:

https://docs.benddao.xyz/portal/risk/interest-rate-model

Depositing an NFT is an equally simple task, your only decision is how much ETH to borrow against that NFT, subject to a maximum cap of 40% of the floor price for the specific NFT collection.

That ETH is available for you to use as you wish, though the loan will be accruing interest at a rate currently of 16.90% in ETH, partially offset by interest income of 14.33% paid in BEND, giving a net headline rate of 2.58%. Note that as with all DeFi products, the net proceeds are dependent on the relative performance of the native token vs ETH. It is not unusual to get paid for taking out a loan, one of the many wonders of DeFi.

Again, the borrow rates change algorithmically as liquidity within the pool changes.

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These two pieces of core functionality give rise to two further useful applications.

If you are an owner of an NFT, and wish to sell that NFT to raise funds, you could list it for sale on BendDAO at your offer price, but immediately receive 40% of the floor price up-front.

Alternatively, you could buy an NFT – from BendDAO or indeed any other secondary marketplace – at the market offer minus 40% of the floor price.

So, all is well and good then?

Perhaps not.

As with all collateralised loans, there is a constant monitoring of the loan versus a metric that measures the “health” of that loan. If that metric falls to a previously determined level, the protocol will sell the collateral to the highest bidder to pay off the loan.

272 Bored Apes have been put up as collateral against ETH loans.

Floor prices for NFTs as measured in ETH have been hurt in line with the broader market sell-off in cryptos. 45 of the Bored Ape loans are now approaching a critical point, with a total of $5.3mm worth of this collection very close to being auctioned to pay off the associated loans.

Meanwhile there are 19 mutant apes for sale.

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I had hoped that given the calm over the last month or more, that enough leverage had been taken out of the crypto world, laying the foundations for a sustainable rally.

It could be the case that we will start to see forced liquidations due to over-leverage in the NFT world, leading to a negative cascade as sellers beget yet more sellers. Contagion to the broader crypto market is a risk that one should not ignore.