BendDAO, which uses NFTs as collateral to loan Ethereum to borrowers, is in hot water.

The project's DAO—a community centered around a shared initiative that uses blockchain-based tokenstokens for collective voting—must now decide whether to adopt a new policy on its liquidation thresholds after seeing its treasury all but drained. 

“They’ve run out of ETH,” Proof's head of research, "punk9059," wrote Sunday in a Twitter thread examining the issue. “People who lent money to others via BendDAO to buy NFTs on leverage can't pull their money out.”

According to Etherscan data, the DAO’s wallet has since received a small influx of funds and now holds roughly 425 ETH, but things aren’t exactly stable yet. One BendDAO co-founder, a Bored Ape Yacht Club NFT holder who goes by CodeInCoffee.eth, put the new proposal to community vote Monday in an effort to stabilize the DAO’s finances and restore confidence in the lending protocol.

The way BendDAO currently works is by enabling users to deposit high-value NFTs into the service and receive up to 40% of the asset's "floor price" as a loan in ETH. On the other side, users who deposit and lend out their ETH earn interest on those deposits. But the incentivizes were evidently misaligned, and an imbalance of borrowers and lenders has caused a lot of bad debt to go unpaid.

“We are sorry that we underestimated how illiquid NFTs could be in a bear market when setting the initial parameters,” the psuedonymous CodeInCoffee wrote on the DAO’s website. 

At the moment, when a borrower defaults on a loan, the NFT used as collateral goes up for auction, but bidders are required to start at 95% of the NFT's value based on the collection's current floor price. If the emergency proposal passes, that liquidation threshold will be reduced over a three-week period, starting at 85% of the asset's value until it reaches 70% by September 20.

That means many valuable NFTs, including Bored Apes, CryptoPunks, Azuki, and CloneX assets, could soon be forcibly sold from their owners. The gradual reduction in threshold, however, is meant to avoid sudden liquidations, without owners "waking up and losing their PFP," according to CodeInCoffee. Apart from thresholds, the proposal would also reduce the time of each auction from 48 hours to 4 hours and increase interest rates for ETH lenders.

Ultimately, the idea here is to make the liquidation and acquisition of the NFT collateral more enticing for buyers. NFTs—unique blockchain tokens that signify ownership—are notoriously illiquid assets, making them much harder to sell than even fungible cryptocurrencies like Bitcoin and Ethereum. Lending protocols such as BendDAO aim to provide options for NFT holders who want liquidity without the need to sell their NFTs, but such lending services can also be susceptible to liquidity issues themselves.

As of Monday afternoon, over 99% of voting BendDAO members have voted in favor of the proposal with its quorum already reached.