There have been some worrying developments in crypto not too long ago, however one specifically caught my eye final week. Solend, the lending platform based mostly on Solana, handed a authorities vote to take over a non-public 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. Against 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 drawback 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 situation. In this occasion, the market could be flooded and doubtlessly 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.”
Consequences of liquidation
Plotting this quantity of SOL towards the buying and selling quantity highlights how a lot of an affect this might have on the market, with set off results of bots on DEXs doubtless additional exacerbating the downward stress induced ought to this pockets flood the market.
The liquidation value of the mortgage is $22.27, which would want a 35% fall from present costs to be triggered. While it is a substantial decline, Solana is down 80% this 12 months alone and a 35% fall from right here is way from inconceivable – and it got here very shut as Solana dipped final week to $25.
The protocol tried to succeed in the whale and enchantment for them to prime 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 danger to the protocol.
After taking on the pockets, the plan was to liquidate the whale by way of over-the-counter transactions, relatively than risking cascading contagion by liquidating on-chain by way of the automated mechanisms.
2/ a whale has a large 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 may induced 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.
So far they’ve moved $25M USDC debt to @mangomarkets
This reveals dedication to working issues out and solves Solend’s USDC utilization drawback.
— Solend (we’re hiring!) (@solendprotocol) June 21, 2022
However, whereas that lessens the vulnerability of the Solend protocol, the liquidation menace does nonetheless stay, which means Solana may be very a lot on edge.
But 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.
But that is precisely the alternative 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 may doubtlessly be taken over? Can larger accounts group collectively to take over smaller accounts and siphon off their funds? Can the protocol house owners declare belongings from wallets in the event that they deem them to be performing in a way inconsistent with their imaginative and prescient?
The actuality is that all the pieces is feasible as a result of it’s centralised, and a harmful precedent has been set. Ironically, it’s basically the largest purpose for the invention of cryptocurrency within the first place – combatting the hazards of centralisation. If Bitcoin founder Satoshi Nakamoto is on the market someplace, he/she should be recoiling in horror.
New vote thought — as a substitute of liquidating the solend whale, everybody that votes sure to this proposal will get to maintain the whales’ funds as a substitute. Solend could have a variety of unhealthy 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 underneath the guise that they might take out a mortgage and do what they wished. Now, the house owners and protocol have stepped within the confiscate that privilege with a purpose to defend the value of their token. Money talks, huh?
As it seems, the protocol isn’t a peer-to-peer, trustless protocol. Instead, it’s a centralised borrowing platform that requires buyers to belief the house owners and different customers. The goalposts haven’t been moved, however relatively they’ve been utterly dismantled.
This isn’t decentralised finance. Instead, it’s still-very-much-centralised-finance.