Solana (SOL): Fear for stability of DeFi Protocol Solend

Jun 21, 2022

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Solana (SOL): Fear for stability of DeFi Protocol Solend

Originally posted here.
By: guido

Overview

The DeFi Protocol Solend, which is based on Solana (SOL), is getting into dangerous trouble. Now rules there are to be changed in a hurry […]

The Post

The DeFi Protocol Solend, which is based on Solana (SOL), is getting into dangerous trouble. Now rules there are to be changed in a hurry to prevent massive liquidations.

The crypto scene is nervous as seldom, since the crash of Terra and UST, systemic risks seem to reveal themselves in other venues as well, at a high rate. Withdrawals have been interrupted for a week at the Celsius platform, and insolvency has apparently occurred at hedge fund Three Arrows Capital (3AC). Now crypto analyst Miles Deutscher is drawing attention via Twitter  to Solana (SOL) and the DeFi protocol Solend, where another ominous situation is brewing.

The hook is a large investor who borrowed $108 million in stablecoins from Solend and pledged 5.7 million Solana (SOL) as collateral. But because Solana has lost significant value recently, Whale is threatened with liquidation of his huge position. In that case, under certain circumstances, Solend would also collapse and bury investor funds under itself. That’s why Solend is discussing and voting on proposals on how rule changes can remedy the systemic risk. Miles Deutscher is not the only one who sees the process as a prime example of what can go wrong in the DeFi division.

Because Solend’s team first rushed forward with a proposal  to manually remove the position of the Whale. This idea was voted for by a clear majority of participants in a corresponding referendum – but it turned out that a single account stood for about 90 percent of all votes cast. When prominent crypto voices such as Cobie, Binance CEO CZ, and FTX CEO Sam Bankmanager-Fried began to scoff at sham democracy, Solend responded promptly. Based on a second proposal , it was decided to invalidate the results of the first and look for another solution to the potential liquidity crisis.

Solend must block withdrawals in USDC due to emergency situation.

This third proposal  from Solend is currently up for a vote and proposes to introduce a $50 million cap on loans and temporarily soften conditions on liquidations of positions. Meanwhile, the major investor around whom the story basically revolves is not responding to attempts to contact him. Solend has temporarily blocked withdrawals for the stablecoin USDC, effectively taking small investors to task. Since Solana’s price has recovered somewhat at the moment, the risk of a crash has decreased. But if SOL were to fall to a level of around $22.30, Solend would have been brought to its knees by a single investor under the old rules.

Conceptual weaknesses are emerging that do not only affect Solend. With hasty voting, it is likely that individual investors with large balances and corresponding voting power will set the strategy in their interest. Also, those who insist on not changing rules in a DeFi protocol after the fact feel screwed, even if they could produce a large number of losers. Buzzwords like “transparency” and “true decentralization” are heard here. One commenter cynically notes, “First I moved my money into crypto to escape bank control. Now I use DeFi, where random developers control my money.”

Summary: Solend under pressure – lesson learned for deFi division.

Criticism of Solana has also previously centered on the fact that Whales call the shots. Solend makes up the largest single item for DeFi under Solana, according to data from DeFiLlama , and a collapse would send shockwaves accordingly. Even if Solend should still succeed this time in defusing the critical situation with proposal number three – a sour taste remains. For the decentralized principle of DeFi is hardly a given with Solend and Solana on closer inspection, and even taboo breaks such as a manual intervention were at least briefly capable of gaining a majority. Miles Deutscher summarizes: The situation highlights the differences between what investors want and what they need at DeFi. A healthy balance between investor protection and decentralization is the challenge facing not only Solana and Solend, according to Deutscher.

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