Solend lending protocol caught in whale-blocking, DeFi-appeasing, Solana-damaging dilemma
Strange things are afoot with Solana… or more specifically, Solend – one of the layer 1 blockchain’s lending-based DAO (decentralised autonomous organisation) protocols.
Essentially, a story is currently playing out that’s been raising the hackles of those who subscribe to the principles of DeFi – namely, the decentralised, secure, self-custody-of-funds principle. And, actually, that’s a significant amount of the crypto space…
So what happened was… on Sunday Solend made a hastily concocted attempt, through its DAO, to gain control of its largest SOL-holding account, which the lending protocol claimed is putting it, and its users’ funds, at risk.
In its first proposal, dubbed SLND1 : Mitigate Risk From Whale, Solend said that the lone “whale” is sitting on an “extremely large margin position.”
The account had apparently deposited 5.7 million SOL tokens into Solend, which makes up more than 95% of deposits. And against that, it was borrowing US$108 million in USDC and ETH.
In the proposed plan, Solend would have been able to enact “emergency powers” to access the whale’s wallet to avoid liquidation. The vote was passed, but flew under the radar of many would-be voters as it was attributed just six hours’ voting time.
What happened next was severe backlash from the crypto community at large, not to mention those within the Solend DAO who missed their chance to vote in the first place.
The beef centred around the criticism of enacting overruling centralised power to control and freeze funds – which completely flies in the face of the tenets of decentralised finance.
my mind is blown by this
not only is this contrary in every way to the "DeFi" ethos, it's also illegal
at *best*, this is trespass/conversion
…with potential to get much worse depending on how things play out… https://t.co/FK3lyb495X
— _gabrielShapir0 (@lex_node) June 19, 2022
Solend took the criticism on board, however, and by Monday, the platform’s users were asked to vote on a new proposal to overturn the first one. The community overwhelmingly voted in favour, with 99.8% voting “yes”.
The SLND2 proposal pushed Solend to find another solution that does not involve forcibly taking over an account. Additionally, it also increased the governance voting time to 24 hours.
In a sense, then, you could say this is a win for decentralisation, as things now stand. But the problem with the whale, who is so far unresponsive or showing no interest in cooperation, is regarded as so dangerous that some seem to think it could even cause a Solana meltdown and a dramatic dump of the SOL token.
This is such copium. trust in your brand is diminished already on the one hand, $SOL to 0 if whale wallet isn’t taken over on the other hand.
— DeFi Plug🔺 (@DeFi_Plug) June 20, 2022
Thus, it’s a major dilemma for Solend. Does it step in (well, completely overstep) and try to save SOL from a potential cascading dump? Or does it avoid proving itself a DeFi farce and risking further reputational damage?
No matter what the team does, there is no way to change the fact that assets deposited into the platform can be confiscated by the team at any time. Escape from the platform is the best way out. At any time the team can tweet an announcement to forfeit your assets.
— cryptokk.eth 🦇🔊(L,3) (@Black_K168) June 20, 2022
Breaking: a new proposal, SLND3, has just gone live at the time of writing.
“The Solend whale situation is continuing to impose a heavy strain on Solend users,” wrote the Solend team. “Users still can’t withdraw USDC, positions collateralized by USDC still can’t be liquidated, and there’s still systemic risk on Solend.”
Among other things, the fresh proposal aims to:
• gradually, over five or six days, bring in a new per-account borrow limit – down from US$120 to US$50m,
• introduce a cap on the amount that can be liquidated in a single transaction,
• and reduce the liquidation penalty forSOL from 5% to 2%.
SLND3: Proposal to just turn off Solend so we can get this awful nonsense out of the timeline. Truly a drag on all of us and an embarrassment to defi.
— FREEGAS.eth (@0xFREEGAS) June 20, 2022