Solend, the largest “decentralized” lending protocol on the Solana platform, just used a governance proposal to seize the funds of a large whale. The whale made up a huge percent of all the lending on the Solana platform and their position is close to being liquidiated. If liquidated, there is concern that there isn’t enough liquidity on the Solana platform to absorb it. Additionally, due to Solana’s continued network issues, there is concern liquidators could crash the network again.
This news comes hot on the heels of major system outages across Solana and the 8th major halt of the network at the end of May.
The Solend protocol is claiming that ‘seizing’ the Solana whale’s funds and executing over-the-counter (OTC) sales is the only path forward. Detractors are saying this flys in the face of decentralization and is essentially abusing governance to steal funds. In the end a super minority of users just gave themselves a newly created power to takeover a large users wallet.
Update: After much backlash, Solend did a 2nd vote nullifying the first.
What is Solend?
Solend is “the leading algorithmic, decentralized protocol for lending and borrowing on Solana.” Solend claims it is “100 times faster and cheaper than Aave or Compound, making DeFi accessible to everyon as it was intended.” They are the “bank of the future, for everyone.”
The “autonomous interest rate machine for lending on Solana” has run into an issue with one whale making up well over 80% of the Solana & USDC/USDT borrowing.
What is Solana?
Solana is one of the largest crypto blockchains by market cap. As stated above, it considers itself an “ETH Killer” and touts its low cost and faster transaction speeds. Solana acheives this with a novel “proof of history” mechanism combined with proof-of-stake. The Solana blockchain has a native cryptocurrency, $SOL, to pay transactions and fees.
The Solana platform has smart contracts and the ability to handle DeFi transactions.
The proof-of-history (PoH) validation method provides every transaction and event on the blockchain with a unique hash and count with a verifiable delay function (VDF). This allows validators to always know the order of transactions and faster speeds.
However, Solana has had major issues with network crashes and halts.
The Solana Whale Keeps Positions Open On Solend
A Solana whale deposited ~5.7 million Solana, which is around $170 million. The whale then proceeded to borrow ~$108 million in stable coins.
With the recent drop in crypto prices, this position is at major risk of liquidation.
[Note – On Ethereum mainnet, there have been large liquidations in the lending protocols like AAVE, Compound, and Maker. These liquidations worked ‘smoothly’ with the protocols behaving as they should and the market absorbing it.]
However, due to Solana’s network issues and the size of the position, there is major concerns that Solana will not be able to absorb the transaction volume or the liquidity needed to clear this much.
The Decentralized Solend Protocol explaining why it needs to seize a whales fund and sell in a centralized OTC way to save the ‘Eth Killer’ Solana from crashing
Solend has its first governance proposal entitled “SLND1: Mitigate Risk From Whale“. The proposal notes that the Solana whale has:
- 5.7 million Solana deposited ($170 million)
- 108 million USDC & USDT borrowed
- 25% of TVL
- 95% of SOL deposits (Main Pool)
- 88% of USDC borrows (Main Pool)
- A liquidation price of $22.30
If $SOL drops to $22.30, then 20% of the Whale’s borrows (~$21 million) becomes liquidatable. If this happens, liquidators would likely spam the liquidate function, which is a known factor of Solana going down.
Liquidators also tend to market sell on DEXes, which would add more volatily and strain.
Many Solend users already withdrew their funds, so the USDC & USDT utilization in the Main Pool spiked to 100% meaning depositors can’t withdraw and positions collateralized by USDC or USDT can’t be liquidated.
The Solend team alleges they tried to get in touch with the whale about both the impending liquidations as well as the borrowing APR adjusting to over 600%. They allege the Whale has been unresponsive.
Solend Governance Passes To Seize Whale’s Funds
On June 19, the governance proposal SLND1 passed.
The Solend team indicated that they will give the whale a grace period before enacting the ’emergency powers’.
However, with this proposal the Solend team is allowing itself to seize a wallet of a user and sell tokens OTC.
This is the protocol who has the words ‘autonomous’ and ‘decentralized’ all over its site.
The results looks pretty definitive that the community is behind the proposal. 97.5% of the votes were votes for the proposal. However, the amount of votes cast was actual <1.2% of actual eligible votes.
To make things worse, 1 wallet had nearly all the voting power and enough votes to pass the proposal on its own.
Granted, the whale with the majority of the votes didn’t vote and allegedly the Solend team didn’t vote. But something doesn’t seem right when 1% of a protocol can vote to seize 80%+ of the protocol users wealth. Especially after the team behind the protocol pushed for the proposal in the first place.
Conclusion: Solend Exposes Major Issues with Solana & DAO Governance
To be honest, everything about this Solend debacle is red flags.
Solend completely botched its risk management by letting a whale account for over 80% of its protocol.
The fact a single user with $700k had super majority voting to push through a proposal to seize the assets of a $270 million whales wallet is…absurd and unbelievable.
Solana’s network troubles continue to cause large issues for the chain and its users.
Additionally, changing the terms of a loan in this fashion seems like it could open up the Solend DAO to legal risks if the Whale sues.
The actions taken here appear to be much more destructive over the long-term than a sloppy liquidation process. This flies in the face of everything decentralization is supposed to fix.
Update: 2nd Proposal to Undue the First
After receiving much backlash after the way the first proposal was conducted, a 2nd proposal was made and quickly approved. SLND2: Invalidate SLND1 and Increase Voting Time was approved with 99.8% of the vote.
It is unclear what the next steps will actually be at this time.
