The cryptocurrency market quickly fell into a bear market following the contentious LUNA cascade. The significant drop in cryptocurrency wrecked numerous crypto companies, businesses, and DeFi protocols. Therefore, many centralized & decentralized platforms are taking countermeasures to combat the crypto winter so as to strengthen their platforms and ensure the safety of investors, and Solend is no exception to this.
In order to avoid a liquidation catastrophe, Solend proposed an ’emergency’ takeover of a crypto whale account. Once the proposal was announced, a heated discussion broke out, and the crypto community vehemently opposed the Solend Proposal.
Let’s take a look at what happened in the Solend protocol.
How Crypto Whales Screwed Solend?
It all began with one gigantic settlement on Solend Protocol by the crypto whale, which borrowed 88% of its stablecoin USDC.
According to the data, the whale had borrowed USDC and USDT stablecoin worth $180M and deposited 5.7M Sol tokens worth $170M, making up 95% of the main pool deposit. According to a crypto analyst, this stablecoin amount represents about 88 percent of all stablecoins offered on Solend.
But after the crypto market plunged into the bear market condition, the market price of the SOL tokens became vulnerable. Thus, jeopardising the future of Solend.
If the SOL token’s market price drops below $22.27, then the account of the crypto whale will also fall into the liquidation scenario and as much as 20% of its borrowing could be liquidated.
The situation is also critical as the Solend Protocol’s smart contract is designed to adjust USDC and USDT borrow rates automatically at their max APY of >60% and >600% for hours.
Solend Protocol has tried to contact the crypto whale to avoid such a scenario of liquidation and save its platform from its downfall. The protocol stated that they have been attempting to contact the concerned Solana whale through their networks and publicly through Twitter since June 13th.
Solend is also getting in touch with the market makers to assess other possible options for a smooth liquidation by leveraging OTC (over the counter) trades, placing bids on other DEXs, and hedging somewhere else.
Solend Proposal #1
On June 19, before the DAO community, Solend protocol presented a proposal SLND #1 to seize control of the crypto whale account in an effort to prevent a liquidation scenario. This was the turning point that set off the crypto community’s fury.
Abundant people from the crypto community criticized this proposal in strict words as it kills the essence of “decentralization”. Cobie called it “comedy” and Binance CEO Changpeng Zhao also raised questions about the proposal.
Solend defended its stance on the proposal by saying that users’ funds will be in great danger if the crypto whale account is liquidated or couldn’t add adequate collateral to it. Users’ funds are also in a vulnerable position because of the high slippage and margin position of the whale.
While so many people were criticizing the proposal, some Cryptopreneurs have praised the idea of bringing centralization for such cases. In the list of supporters, the leading crypto exchange FTX CEO, SBF is on the top list for his strong vocal support for the proposal.
The proposal was put forward with two choices:
- Yes: Put in place extra margin requirements for big whales that account for more than 20% of borrowings. A particular liquidation threshold of 35% is necessary if a user borrows more than 20% of all borrows for the Main Pool. Upon the proposal’s adoption, this policy will become effective.
- No: Do nothing.
Out of nowhere, the proposal got 97.5% (1.15M) votes in the favor with the big ‘YES’ in comparison to 2.5% ‘NO’. The community found something skeptical about the result as it was unexpected and unmatched by the sentiments spread around the community.
After a while, on-chain data revealed that more than 90% of votes dropped by just one user! This is insane and shows the loopholes present in the decentralized governance mechanism.
These flaws in the system do overpower users with the decision-making capability of entire pool funds. A large portion of token holders can use this power for wrong intentions or manipulation of the pool fund via malicious proposals.
Solend Proposal #2
As Solend Proposal #1 was a total fail, so Solend terminated it through another proposal entitled “Invalidate SLND1 and Increase Voting Time” on June 20. Three key points of SLND2 were:
- Invalidate the last proposal;
- Increase governance voting time to 1 day;
- Work on a new proposal that does not involve emergency powers to take over an account.
The second proposal got an immersive and considerable result with 99.8% votes in favor. With the end of SLND #1, preparation for a new proposal also began.
Solend Proposal #3
After envisaging liquidity issues on the platform, Solend introduced a third proposal SLND #3 on June 21 to set a borrowing limit on the protocol to prevent an on-chain liquidation crisis.
SLND #3 asks to set a borrowing limit of $50M, with a fully collateralized value. If the debt exceeds this limit, then collateralized assets will be liquidated. However, this limit would not be imposed suddenly as it will be initiated from the $120M and slowly reduced to $50M. Solend expects a $500K per hour reduction.
The proposal also asks to reduce the maximum liquidation close factor from 20% to 1% and the liquidation penalty for SOL from 5% to 2%.
The result of this proposal is still awaited. However, since it received 99% of the vote in favor, the community might approve it. Liquidators will need to update their bots to adopt any required adjustments if the proposal is approved.
Crypto Whale Initiated Transfer of Fund
According to the latest update from Solend, the crypto whale that holds 88% of USDC borrowing of Solend, has moved funds. This update alarmed the users of Solend as it prompts the risk of contagion to other platforms and investors in case of liquidation.
However, Solend later revealed that the whale took the action on their instruction to scatter his position across different centralized and decentralized platforms. To obey this instruction, the whale moved out of $25M USDC debt to another decentralized lending protocol Mango Market.
Solend believes that their plan is actually working, although there is more to go. The protocol is in talks with the crypto whale and Mango Market to resolve the liquidation issue.
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Author
Chris Munch is a professional cryptocurrency and blockchain writer with a background in software businesses, and has been involved in marketing within the cryptocurrency space. With a passion for innovation, Chris brings a unique and insightful perspective to the world of crypto and blockchain. Chris has a deep understanding of the economic, psychological, marketing and financial forces that drive the crypto market, and has made a number of accurate calls of major shifts in market trends. He is constantly researching and studying the latest trends and technologies, ensuring that he is always up-to-date on the latest developments in the industry. Chris’ writing is characterized by his ability to explain complex concepts in a clear and concise manner, making it accessible to a wide audience of readers.
