The Competition Between the Leading NFT Lending Protocols: BendDAO and Dark Horse ParaSpace

Why are NFT Lending Projects Important?

The project to be explained here is closely related to the liquidity of NFT. In the current NFTFi ecosystem, NFT trading platforms and liquidity protocols, such as OpenSea, LooksRare and other platforms that allow people to buy and trade NFTs, have the largest share. As people want to further improve their capital utilization and make other investment decisions by lending NFT in exchange for better cash flow, the NFT lending protocol is now the largest NFTFi category outside the trading platform. You can have an overview of the entire ecology by taking a look at the following picture:

BendDAO: the Peer-to-Pool NFT Lending Project

BendDAO mainly features the first Peer-to-Pool decentralized liquidity mechanism. Depositors of BendDAO provide ETH to liquidity pools to earn interest, and then borrowers of NFT projects can obtain instant NFT-backed loans via these pools. It can be seen that BendDAO does not focus on “NFT fragmentation” to obtain liquidity. Currently, BendDAO supports multiple NFT blue chip projects, such as Azuki, CryptoPunks, MAYC, BAYC, etc.

Moreover, BendDAO still has many interesting functions, including bidding, installment payment, and the token economic model. Next, we will introduce them one by one and explain the risks to be noted.

Tutorial: how to quickly get started with NFT lending

Lend assets:

1. Go to benddao.xyz and connect your wallet

2. Click “Liquidity” - “Deposit ETH”
   

3. Input the amount of ETH you want to deposit, then click “Deposit”. Then, you can check the deposit APR on the box.
   
4. Complete the transaction

Borrow assets:

1. Go to https://www.benddao.xyz/en/ and connect your wallet

2. Click “Liquidity” - “Borrow ETH”

3. Check the NFT deposit items currently supported on the left side of the page: If you have one of the NFTs and want to lend out it, click “Deposit NFT ‘’.
   

4. Sign to authorize the two transactions: one is to authorize debt tokens and the other is to authorize NFT

5. Enter the amount you want to borrow and click “Borrow ETH”

6. Then, you can repay your loan as needed on the BendDAO’s Borrowing Dashboard

Collateral Listing

For the benefit of borrowers, the fast NFT lending service provided by BendDAO integrates basic collateral listing functions. NFT traders may receive a flash loan of up to 40% of the underlying value of the listing before the NFT item is sold. The buyer repays the loan and the expected interest after the transaction.

NFT installment payment service

Buyers can purchase blue-chip NFT projects at a minimum 40% down payment based on the actual price while initiating a flash loan from AAVE to cover the rest. The borrowed amount of the flash loan will be repaid via the “instant NFT loan” on BendDAO. Buyers will automatically become installment borrowers. Borrowers can also list their staked NFTs for sale even if they have not fully repaid the NFT borrowing yet.

Check a more detailed process as follows:

1. Buyer pays a minimum 40% down payment
2. Initiate a flash loan and repay the rest amount to a third-party platform such as AAVE;
3. Newly purchased NFTs will be used as collateral on BendDAO to gain instant liquidity;
4. The flash loan will be repaid with ETH borrowed from BendDAO.
5. Buyers become borrowers and can list their collateralized NFTs for sale on the BendDAO marketplace.

Presently, NFT projects that support installment payments include BAYC, CryptoPunks, MAYC, Doodles, Space Doodles, CloneX, and Azuki. The down payment ratio is determined according to the LTV (Loan to Value Ratio) on BendDAO.

NFT Auction Bidding

When the health factor of the NFT collateral falls below 1, an NFT auction will be initiated. If the liquidation threshold for collateral is 80%, then the loan will be liquidated when the value of the debt equals 80% of the value of the collateral. The auction includes bidders and borrowers, with the following to be noted:

• All people can participate in the auction
• Borrowers will have to repay the loan during the liquidation protection period.
• If the borrower repays within 24 hours, the first bidder will get at least 0.2 ETH paid by the borrower as liquidated damages.
• If the borrower does not repay the loan, the highest bidder will receive the collateral, namely the NFT of its borrower.
• If the collateral is sold at auction for a price higher than the lending amount, the excess will go to the borrower.

ApeCoin Staking: Bend’s Pairing Staking

On December 6, 2022, ApeCoin DAO’s staking system ApeStake.io officially launched APE deposits and made them available to the public. ApeStake.io‘s staking mining system divides user assets into four pools based on categories, namely ApeCoin pool, BAYC pool, MAYC pool, and BAKC matching pool. Users need to hold the assets required by each pool to pair themselves. It can be described as “independent combined staking mining”.

Besides, BendDAO also launched the BendApeStaking service, and the “pairing staking” function allows users to stake even if they only hold part of the assets required by the mining pool. In other words, if the user only holds ApeCoin or a certain NFT (BAYC\MAYC\BAKC), they can participate in mining.

According to the requirements of the official staking mining, a user must have BAYC NFT. Only by participating in the official staking mining and ApeCoin corresponding to the mining pool can the user get the highest expected rate of return. Through BendDAO, a user can mine without ApeCoin if he/she has a BAYC NFT because the system will match the ApeCoin staked by others for the user.

• According to the proportion of income distribution from mining we set, the more income we offer, the easier it is to match ApeCoin.
• Currently, BendDAO charges 4% of the user’s staking income as a matching service fee

Advantages and Risks of BendDAO

Advantages

• Security: BendDAO uses the ERC-721 protocol to bind the staked NFT to the BendDAO loan. Since the mechanism prohibits the transfer of the bound NFT, BendDAO provides an anti-theft security guarantee.
• Liquidity Protection: BendDAO has 24-hour liquidation protection. To avoid losses caused by market fluctuations, borrowers will have a 24-hour forced liquidation protection period to repay the loan. If they repay within the 24-hour liquidation protection period, their NFT-backed loan will never be liquidated. Therefore, NFT traders can take advantage of the liquidation protection period, without having to sell the NFT or bear any losses due to price changes.

Risks

• Collateral risk: When using BendDAO, users should understand its risk assessment strategy, such as reserve risk, NFT risk parameters, and liquidity risk. If the borrower fails to repay the loan on time, the lender can repossess the collateral. This can lead to a drop or loss in the value of the collateral.
• Smart contract: At present, the liquidity loan of NFT is still a new development, and it remains unknown whether there will be lightning loan attacks in the future.

BEND Token Economics

BEND is the native governance token of BendDAO. It also introduces a common veModel. In other words, BEND can be staked to obtain managed BEND (veBEND) chosen by voting. The initial total supply of BEND is 10 billion:

Practical uses of veBEND:

veBEND cannot be transferred, and locking BEND for a maximum of four years is the only way to obtain veBEND. A BEND locked for four years generates a veBEND, with a model similar to other veModels.

Governance vote

veBEND holders can participate in the vote of the Bend protocol, such as voting to decide using which NFTs as collateral to borrow ETH and provide liquidity. As long as the backed NFT liquidity improves, veBEND will benefit all NFT holders. veBEND holders will be able to vote for 4 of 7 blue-chip NFTs. They will be backed by an initial ETH lending pool. The 7 NFT series are Mutant Ape YC, Cool Cats, Doodles, CLONE X, Azuki, World of Women, and CyberKongz.

Share of the protocol revenue

There is an official fee ratio and share estimate:

Estimated annual protocol fee: Assume that 30% of the ETH in the pool is lent, the borrowing rate is 15%, and the protocol management fee is 30%.

Paraspace: the dark horse lending protocol

Above we have introduced the Peer-to-Pool NFT project represented by BendDAO. However, Paraspace, as an emerging decentralized lending protocol, also adopts similar technology: Using smart contracts and serving NFT as collateral, it creates users a safe, transparent and efficient lending platform.

ParaSpace once tweeted that the development time for ParaSpace DAO and governance tokens will be advanced from the 2nd quarter of 2023 to the 1st quarter, so those who want to get airdrop should also pay attention to this potential project.

Current performance

In terms of TVL, it even jumped to 2nd place on the NFT lending list. Currently, it still shows very strong momentum in increase, and the gap with the NO.2 BendDAO has been reduced to less than twice. It is expected to see whether Paraspace will threaten to replace the market position of the established projects.

It can be said that the listing of Paraspace has created a menacing atmosphere. During the two months since it was launched and without token incentives, it has already surpassed the established projects BendDAO and NFTfi in terms of the loan amount. Therefore, regarding it as a dark horse can not be overemphasized. Next, let’s take a look at what makes Paraspace special and why it’s so successful.

Features and Innovations of Paraspace

At present, Paraspace mainly provides three kinds of services:

• Blue chip NFT, Uniswap V3 LP, aTokens and cTokens collateral lending service
• APE’s staking service
• Installment payment and NFT bidding service

Though Paraspace seems like the BendDAO just introduced, Paraspace has put a lot of effort into the details, and it has six major features:

1. Innovative Collateral Lending Model under the Credit System
2. Its collateral covers a variety of interest-bearing tokens
3. Pack and stake the whole series of NFTs
4. “One-click configuration” and automatic restake of APE staking
5. Faster support for NFT series
6. Credit Advance (Buy Now, Pay Later)

Credit lending system

Actually, the “Credit Lending System” is a set of credit mechanisms introduced, turning the commonly used isolated margin pool into a cross-margin system. All collateral, including LP Token and NFT, will have a corresponding credit line, and users can use the line to provide loans for all collateral. The entire staked asset portfolio will generate a healthy coefficient. As long as the coefficient remains above 1, the staked NFT will never trigger a liquidation auction.

Problems with the design of the traditional deposit pool?

Under the traditional isolated margin pool, if you want to stake 5 BAYC (Bored Ape Yacht Club) to borrow ETH to buy other NFTs, you have to conduct 5 different on-chain transactions, and then manage these 5 separate loan positions, bringing a lot of unnecessary operations to the user. And based on the “isolation” design, if, unfortunately, your BAYC is about to be liquidated, you can only repay the loan immediately to protect your BAYC from being liquidated by auction.

With Paraspace’s credit limit design, you can deposit more collateral (NFT or ERC-20 Token) to maintain a high health factor, so as to avoid any liquidation. Presently, as long as it is a collateral type supported by ParaSpace, it has a corresponding total value. However, one of the upsides of the cross-margin model is that it can be hedged. If the user has an NFT portfolio with a negative price correlation, it can reduce the risk of liquidation caused by a sudden price change in a collectible.

For readers who are familiar with trading, the whole concept is like the position of a contract account. By virtue of cross margin, traders can use fewer funds to trade and obtain higher leverage ratios, so that they can gain higher earnings in the market.

Besides NFT, interest-bearing assets can also be used as collateral

What is the Uniswap V3 LP token?

If you know the Uniswap V3 LP token, you can skip this part. On Uniswap v3, liquidity provider (LP) positions are represented by NFTs (ERC-721 tokens), rather than the earlier version of fungible ERC-20 tokens. It will generate a unique NFT representing your share in a particular pool based on the Uniswap pool and the parameters you choose on the liquidity provider interface. The picture below shows an LP token in the “USDT / DAI” pool.

An owner of an NFT can modify or redeem the position at any time. As a matter of fact, LP is betting that the price of the asset pair will remain within a certain price range because LP holders will be paid based on the trading volume within that range. That’s why LP tokens belong to one of the interest-bearing assets. In fact, Paraspace also supports AAVE’s aTokens and Compound’s cTokens. The principle of these two Tokens resembles that of Uniswap V3 LP Token, and they are deposit certificates on the platform.

Benefits of introducing interest-bearing assets as collateral

1. Improve the user’s deposit yield, allowing the borrower to pay less for the loan and achieve greater capital efficiency
2. Increase the TVL of ParaSpace
3. Allow for more application scenarios of native projects of interest-bearing assets and promote the common prosperity of NFT-DeFi

In terms of specific operations, users can obtain a credit line by staking UniV3 LP tokens. With the higher credit line, users can borrow NFT or other ERC20. What’s better is, users can continue to earn LP handling fees. This helps improve capital efficiency. Currently, supported LP pools are as follows:

Packaged collateral

When borrowing via ParaSpace, users can package their asset portfolio as collateral. The maximum amount that can be borrowed is based on the weighted collateral factor. In other words, the whole portfolio is directly staked to borrow, cutting some steps. There is an official example:

Assuming that the lending ratios of BAYC, ETH, and USDC are 30%, 82.5%, and 82.5% respectively. When a BAYC worth 80 ETH, 4 ETH, and 800 USDC worth 0.6 ETH are staked, the total amount that can be lent is: 30% 80 ETH + 82.5% 4 ETH + 82.5% * 0.6 ETH = 27.795 ETH, or tokens of equivalent value.

APE Staking and automatic restake

After ApeCoin staking was launched, ParaSpace also listed a Peer-to-Pool staking scheme. It works differently from BendDAO’s Peer-to-Peer model which offers users a higher degree of freedom.

Holders of Ape NFT who stake NFT on ParaSpace can borrow the required APE tokens from the APE lending pool to match their own NFTs. It is unnecessary to find specific APE token holders who can stake their tokens to the holders’ NFT. This is different from the BendDAO model. Meanwhile, holders of APE tokens only need to deposit their own APE tokens into the ParaSpace lending pool to obtain APE Staking incentives that earn profits in the form of lending rates.

Except for Paraspace and BendDAO, Binance also has Ape’s staking service. We won’t go into details here. There is a comparison chart attached for your reference:

Credit：0xJamesXXX

Paraspace has two advantages in staking APE: the convenient “one-click configuration” and the automatic restake function. One-click configuration means that one can only use one click to complete the three steps of “stake NFT - lend Ape Coin - combined staking mining”, having improved user experience. With the automatic restake function on Paraspace, when staking $APE to mine $APE, for example, one can save gas fees and further increase staking rewards. The chart below shows the power of compound interest, with yields varying by as much as 50%.

Faster support for NFT series

Currently, ParaSpace supports 9 NFT series collateral loans:

They are blue chip NFTs like Bored Ape Yacht Club, Mutant Ape Yacht Club, CryptoPunks, Doodles, Otherdeed, CloneX, Azuki, Moonbirds, and Meebits.

It is worth mentioning that Paraspace is faster than BendDAO in supporting the NFT series, BendDAO needs to support Otherdeed first. As for the NFT Lending development, it can be said that the more series are supported, the greater the value and practicality of the project, and, meanwhile, it will attract more NFT players.

BNPL

NFT installment payments are also allowed on BendDAO. So, users can purchase NFTs with as little as a 60% down payment by re-stake the purchased NFTs back to the platform. In addition to purchasing NFT in the form of a down payment on Paraspace, users can also directly use their credit line to pay the down payment. It is a unique feature of the credit system on Paraspace.

According to the official example, it combines the “credit” generated from your current collateral with the “credit” generated from the NFT you bought and restaked to buy NFT.

The upside of operating in this way is that it achieves greater capital efficiency. For example, you may need to sell one NFT to buy another NFT at a higher price. However, by providing your own NFT, you don’t have to sell and can get a higher-priced NFT. You can repay the credit line to withdraw the NFT you bought.

Potential problem with ParaSpace?

• Product moat: It is very easy for people to copy the ultra-high interest rate and restake mechanism derived from the APE ecology. Similarly, it doesn’t require high technology to implement the credit system.
• Security: different NFTs and tokens are involved in the packaged collateral. The more complex the function, the greater the probability for it to malfunction. Although Paraspace is still a new NFT project, it has a careful audit process. It can be seen that Paraspace has had a total of 6 audits, including audit teams such as Trail of Bits and Certik, and teams such as Slowmist and Quantstamp are expected to be carried out in the first quarter of 2023. There are also corresponding audit reports for services such as the automatic compound interest of Ape tokens and P2P staking.

Conclusion: win with innovation

The NFT lending projects release illiquid assets and idle capital. It is playing an important role as the number of Web3 users and NFT use cases increases. Both major competitors in the market, BendDAO and ParaSpace, use the peer-to-pool lending model. Although it allows borrowers to obtain funds in an easier and faster way, it means that default risk accumulates at the protocol level, as borrowers can no longer figure out which NFT supports their funds, making it more difficult for them to assess the lending risk.

In the competitive pattern of the NFT market, we found that established projects can also be easily caught up by creative projects. Paraspace became a dark horse because it launched a credit lending system. Then, what will BendDAO do in response? At present, Paraspace’s governance token has not yet been launched, and the struggle between BendDAO and Paraspace may depend on the economic model of its token. Readers who want to obtain airdrops may wish to interact more on Paraspace to win airdrop opportunities!