There have been some worrying tendencies in crypto just lately, however one specifically caught my eye final week. Solend, the lending platform primarily based on Solana, handed a authorities vote to take over a personal pockets.
The non-public pockets (referred to henceforth because the “whale”) deposited 5.7 million SOL, at present value $200 million, onto the lending platform. In opposition to this place, the whale borrowed $108 million of stablecoins. The 5.7 million SOL tokens comprised over 95% of whole deposits on the platform.
The issue arose when the Solana value tanked alongside the broader market, decreasing the worth of the whale’s collateral drastically and bringing into play a possible liquidation state of affairs. On this occasion, the market can be flooded and probably crater the worth of the Solana token.
“In the worst case, Solend could end up with bad debt,” Solend mentioned. “This could cause chaos, putting a strain on the Solana network.”
Penalties of liquidation
Plotting this quantity of SOL towards the buying and selling quantity highlights how a lot of an impression this might have in the marketplace, with set off results of bots on DEXs possible additional exacerbating the downward stress brought on ought to this pockets flood the market.
The liquidation value of the mortgage is $22.27, which would wish a 35% fall from present costs to be triggered. Whereas it is a substantial decline, Solana is down 80% this yr alone and a 35% fall from right here is much from inconceivable – and it got here very shut as Solana dipped final week to $25.
The protocol tried to succeed in the whale and attraction for them to high up the mortgage, however there was radio silence, with the pockets inactive for practically two weeks. So, a vote handed and the protocol voted to quickly take over the whale’s pockets and cut back threat to the protocol.
After taking on the pockets, the plan was to liquidate the whale through over-the-counter transactions, somewhat than risking cascading contagion by liquidating on-chain through the automated mechanisms.
2/ a whale has an enormous place of $170M SOL deposited and $108M stables borrowed. they’re at present 95% of the SOL deposits and 86% of USDC borrowshttps://t.co/Xp7Xym5LQt
— Rooter | Solend (hiring!) (@0xrooter) June 18, 2022
Since then, the whale transferred $25 million to Mango markets, limiting the destruction that might brought on on Solend ought to the liquidation set off.
3oSE…uRbE has acted on our suggestion to unfold their place throughout lending venues (decentralized and centralized) as a primary step.
Up to now they’ve moved $25M USDC debt to @mangomarkets
This exhibits dedication to working issues out and solves Solend’s USDC utilization drawback.
— Solend (we’re hiring!) (@solendprotocol) June 21, 2022
Nevertheless, whereas that lessens the vulnerability of the Solend protocol, the liquidation risk does nonetheless stay, that means Solana may be very a lot on edge.
However let’s cease to consider this for a second.
I perceive the protocol didn’t find yourself taking on the pockets as a result of the pockets withdrew independently, however the vote handed and that was the plan. It also needs to be famous that following intense backlash on Twitter, one other vote handed on Solend to overturn the sooner vote.
However that is precisely the other of what cryptocurrency is supposed to be: decentralised, censorship-resistant and trustless.
And with the precedent set, the place is the road drawn? Whose accounts might probably be taken over? Can larger accounts group collectively to take over smaller accounts and siphon off their funds? Can the protocol house owners declare property from wallets in the event that they deem them to be appearing in a fashion inconsistent with their imaginative and prescient?
The fact is that every part is feasible as a result of it’s centralised, and a harmful precedent has been set. Mockingly, it’s basically the largest motive for the invention of cryptocurrency within the first place – combatting the risks of centralisation. If Bitcoin founder Satoshi Nakamoto is on the market someplace, he/she have to be recoiling in horror.
New vote thought — as an alternative of liquidating the solend whale, everybody that votes sure to this proposal will get to maintain the whales’ funds as an alternative. Solend may have loads of dangerous debt however the token holders that voted sure will probably be wealthy. lfg!
— Cobie (@cobie) June 19, 2022
It’s not clear who the whale is, however they’ve been let down badly by the protocol. They deposited that cash below the guise that they may take out a mortgage and do what they needed. Now, the house owners and protocol have stepped within the confiscate that privilege with a view to shield the value of their token. Cash talks, huh?
Because it seems, the protocol will not be a peer-to-peer, trustless protocol. As an alternative, it’s a centralised borrowing platform that requires buyers to belief the house owners and different customers. The goalposts haven’t been moved, however somewhat they’ve been utterly dismantled.
This isn’t decentralised finance. As an alternative, it’s still-very-much-centralised-finance.