The Fragility of NFT-Backed Lending: A Case Study on the Liquidity Crisis of BendDAO

DOI

10.2991/978-94-6239-604-3_23How to use a DOI?

Keywords

Decentralized Finance; Non-Fungible Tokens; NFTs-Backed Lending; Liquidity Risk; Death Spiral

Abstract

The rise of Non-Fungible Tokens (NFTs) has created a demand for using these liquid assets as collateral in decentralized finance (DeFi). Protocols such as BendDAO, which are peer-to-pool based, have been created to facilitate lending with NFT collateral. However, the very nature of NFTs and their inherent instability and poor liquidity present a challenge to the risk models of these protocols. This paper analyzes the event where the BendDAO protocol nearly collapsed in August of 2022 through an in-depth case study. By analyzing on-chain data and the mechanics of the protocol, the paper analyzes why the risk model of the protocol failed. The research found that the liquidation mechanism of the protocol, which was completely reliant on continuous market liquidity, became a primary source of systemic risk during a market downturn. A vicious cycle began. First there was a drop in NFT floor prices. Then widespread liquidations followed. Those liquidations failed to liquidate due to a lack of market depth. Thus there were bad debts and panic. All of this brought the protocol to the brink of bankruptcy. The research highlights the frequently overlooked relationship between market liquidity and the design of the liquidation mechanism in NFT-based finance. The paper concludes that for NFT-supported lending to be sustainable over time, the risk models of these protocols cannot solely rely on variable parameters based on market-driven liquidations.

Copyright

© 2026 The Author(s)

Open Access

Open Access This chapter is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License (http://creativecommons.org/licenses/by-nc/4.0/), which permits any noncommercial use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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TY  - CONF
AU  - Jiajing Lin
PY  - 2026
DA  - 2026/02/26
TI  - The Fragility of NFT-Backed Lending: A Case Study on the Liquidity Crisis of BendDAO
BT  - Proceedings of the 5th International Conference on Economic Development and Business Culture (ICEDBC 2025)
PB  - Atlantis Press
SP  - 206
EP  - 218
SN  - 2352-5428
UR  - https://doi.org/10.2991/978-94-6239-604-3_23
DO  - 10.2991/978-94-6239-604-3_23
ID  - Lin2026
ER  -