The Solend epic has been the number one topic in the crypto space for the last few days. And it shines a light on some important shortcomings in the DeFi sector that cannot be ignored.
Solend, a decentralized funding platform based on the Solana blockchain, ran into a problem when one participant had an “extremely large margin position” on his hands. This potentially puts the protocol and its users at risk.
This wallet accounted for 95% of all deposits in Solana (SOL) and 86% of loans in USD Coin (USDC) on Solend. The proposal was: “If SOL falls to $22.30, we will start with a partial liquidation – 20% of the account ($21 million)”. That’s what one of Solend’s protocol executives wrote.
The problem is that the developers did not want to deal with the sale of so much $SOL (at the time of liquidation about $21 million) through their own platform. For Solend, this is an additional risk due to lack of liquidity and fear of a collapse of $SOL, which is the base token.
To avoid such dire consequences, a vote was taken to grant extraordinary powers to Solend Labs to manage the whale account. In fact, the vote approved the idea of liquidating Whale’s assets through “over-the-counter” transactions, rather than exchange trades. This was justified with the intention of avoiding a possible cascade of liquidations.
Community response and displacement of funds
When the first proposal allowing the protocol to seize the whale’s pledge and sell it over-the-counter was passed, Solend was criticized for stealing users’ assets and working against the principle of immutability and lack of authorization in DeFi.
Jordan Fish – Kobe, a veteran of the crypto community – mocked the incident on Twitter:
Later, Bitcoin bull Lin Alden fueled the discussion with a retweet: implying that this project is just one of many scams.
Users are concerned about the damage being done to DeFi’s image.
The CEO of Ava Labs noted that such a move would have serious consequences – it would be followed by cascading liquidations on DEX, and the price of Solana (SOL) would fall to zero.
In a new vote, the Solana-based Solend crypto lending protocol community overturned a previous decision to control a major position holder’s account.
On June 19, the Solend team put SLND1’s proposal for special margin requirements for large users to a vote. The developers also asked for temporary authority to manage the whale account, which accounts for 95% of all deposits in Solana (SOL) and 86% of loans in USD Coin (USDC).
The action was prompted by fears of a possible cascading decline in the SOL price as a result of the liquidation of positions.
The vote was given 5.5 hours, during which the proposal received the support of the DAO of 97.5%.
However, within 24 hours, the team introduced SLND2, which includes:
- the cancellation of the previous offer;
- increasing the voting time to 24 hours;
- development of non-emergency measures to control accounts.
SLND2 was supported by 99.8% of votes.
On June 18, the price of $SOL dropped below the level of $28, but in the next two days rose above $35 (CoinGecko). Liquidation threshold for whale positions is $22.27.
The developers admitted that twenty-four hours for a vote is still “not enough.” However, in their opinion, “we need to act quickly to eliminate systemic risk.”
The team pointed out that a whale himself supported both the first and second proposals. He called for an SLND3 with a “better solution” as soon as possible because the market is “constantly changing within 24 hours.”
This shows the cracks in the DeFi ecosystem as a whole. Hence these hasty decisions and manipulation, which clearly will not be good for the industry. And the big question remains – is the decentralization that has been talked about so much a myth? Time will tell.