You’ll be shocked — shocked — to learn that a crypto lending platform that loaned out for collateral consisting of things like six-figure cartoon ape NFTs has had a liquidity crisis.
BendDAO, a decentralized version of a crypto lending platform — you know, like now-bankrupt centralized lenders Celsius and Voyager Digital — ran into liquidity troubles that turned into a run that drained its reserves from about 10,000 ether to five.
While traditional crypto lenders loan stablecoins to people who are willing to put up collateral in cryptocurrencies like fairly liquid bitcoin and ether of 125% to 150% of the amount they wish to borrow, BendDAO borrowers were able to use nonfungible tokens (NFTs) to borrow 30% to 40% of the “floor price” — the minimum any item in the NFT collection is selling for on top marketplaces — of that NFT. More than a few used this to essentially buy NFTs on margin.
If the value dropped too close to that amount and a margin call wasn’t met, the decentralized finance (DeFi) platform would automatically auction it off. The problem, CoinDesk said on Saturday (Aug. 19), is that only bids within 5% of the floor price were accepted.
While it seems to have stabilized — the platform’s digital wallet had more than 4,500 ETH on the evening of Monday (Aug. 22) — the problem began when news broke in industry outlets like CoinDesk that tumbling NFT prices were pushing dozens of high-end NFT collectibles like Bored Ape Yacht Club and CryptoPunks to the edge of forced liquidation.
With bids coming in slowly or not at all, the lenders who deposited funds with BendDAO in exchange for high-interest rates began to fear a failure and stampeded to the exit, withdrawing their funds bank-rush style, CoinDesk said on Aug. 22.
By Sunday night, the cupboard was bare and other investors who’d “lent money to others via BendDAO to buy NFTs on leverage can’t pull their money out,” according to the director of research of a private NFT community, Proof.XYZ.
Ok. Long thread on the BendDAO situation:
1) They’ve run out of ETH. There is just 12.5 WETH in the contract.
2) What does this mean? People who lent money to others via BendDAO to buy NFTs on leverage can’t pull their money out. About 15,000 ETH was lent.
— NFTStatistics.eth (@punk9059) August 21, 2022
According to a post on the BendDAO website an — anonymous, naturally — developer going by “codeincoffee” proposed changes that would make it easier to sell NFTs at auction by allowing bids of as little as 70% of the floor price, as opposed to 95%.
“We are sorry that we underestimated how illiquid NFTs could be in a bear market when setting the initial parameters,” they said.
That’s One Way
Lawyers for a former manager of top NFT marketplace OpenSea have taken an interesting direction in defending him against criminal insider trading charges, arguing that the court should dismiss the charges against their client on the grounds that NFTs are not securities.
In most — but not all — circumstances the U.S. Securities and Exchange Commission agrees with the latter point.
Former OpenSea product manager Nate Chastain was arrested in June on charges of wire fraud and money laundering for using his confidential knowledge of which NFT collections were going to be highlighted on OpenSea, easily the largest and most influential NFT marketplace. That high-profile marketing would move prices, the government alleged.
His legal team is not denying the actions. “As alleged, acting with purported criminal intent, Mr. Chastain exploited his advance knowledge of which NFTs would be featured on OpenSea’s homepage by purchasing certain NFTs before they were featured and selling them at a profit after they were featured,” they wrote in an Aug. 19 filing. “The rub, however, is that the NFTs are neither securities nor commodities.”
Arguing that “the government agrees” on the latter point, Chastain’s attorneys ask, “Can the government proceed on a Carpenter wire fraud theory of insider trading in the absence of any allegation involving securities or commodities trading? The government, of course, says yes. The Supreme Court and 40 years of insider trading precedent say no.”
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