There have been some troubling trends in cryptocurrencies recently, but one in particular caught my eye last week. Solend, the Solana-based lending platform, passed a government vote to take over a private portfolio. The private portfolio (hereinafter referred to as the “whale”) deposited 5.7 million SOL, currently worth US$200 million, on the lending platform. Against this position, the whale lent $108 million worth of stablecoins. The 5.7 million SOL tokens accounted for more than 95% of total deposits on the platform. The problem arose when Solana’s price plummeted alongside the broader market, dramatically reducing the value of the whale’s collateral and putting a potential liquidation scenario into play. In that case, the market would be flooded and potentially hurt the value of the Solana token. “At worst, Solend could end up with bad debts,” Solend said. “This could cause chaos, overloading the Solana network.”
Settlement consequences
Plotting this amount of SOL against trading volume highlights the impact it would have on the market, with bot triggering effects on DEXs likely to further exacerbate the downward pressure caused if this portfolio flooded the market.
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The loan settlement price is $22.27, which would need a 35% drop from current prices to trigger. While this is a substantial decline, Solana is down 80% this year alone and a 35% drop from here is far from inconceivable — and it came very close when Solana dropped last week to $25.
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Protocol tried to get to the whale and appeal to them to complete the loan, but there was radio silence, with the wallet inactive for nearly two weeks. So a vote was passed and the protocol voted to temporarily take over the whale’s portfolio and reduce the risk to the protocol. After taking over the wallet, the plan was to liquidate the whale through over-the-counter transactions, rather than risk cascading contagion by liquidating on-chain through automatic mechanisms.
2/ a whale has a massive position of $170M SOL deposited and $108M stables borrowed. they’re currently 95% of the SOL deposits and 86% of USDC borrowshttps://t.co/Xp7Xym5LQt — Rooter | Solend (hiring!) (@0xrooter) June 18, 2022
The whale has since transferred $25 million to Mango markets, limiting the destruction it would cause in Solend if the liquidation were triggered.
3oSE…uRbE has acted on our suggestion to spread their position across lending venues (decentralized and centralized) as a first step. So far they’ve moved $25M USDC debt to @mangomarkets
This shows commitment to working things out and solves Solend’s USDC utilization problem. — Solend (we’re hiring!) (@solendprotocol) June 21, 2022
However, while this lessens the vulnerability of the Solend protocol, the threat of settlement still remains, which means that Solana is very much on edge. But let’s stop and think about this for a second.
precedent
I understand that the protocol did not end up taking over the wallet because the wallet was independently withdrawn, but the vote was passed and that was the plan. It should also be noted that after intense backlash on Twitter, another vote was passed on Solend to overturn the previous vote. But this is the exact opposite of what cryptocurrency should be: decentralized, censorship-resistant, and trustless. And with the precedent set, where is the line drawn? Whose accounts could potentially be assumed? Can larger accounts group together to take over smaller accounts and siphon their funds? Can protocol owners claim portfolio assets if they feel they are acting inconsistently with their vision? The reality is that anything is possible because it is centralized and a dangerous precedent has been set. Ironically, it is essentially the biggest reason for the invention of cryptocurrency in the first place – to combat the dangers of centralization. If Bitcoin founder Satoshi Nakamoto is out there somewhere, he must be writhing in horror.
New vote idea — instead of liquidating the solend whale, everyone that votes yes to this proposal gets to keep the whales’ funds instead. Solend will have a lot of bad debt but the token holders that voted yes will be rich. lfg! — Cobie (@cobie) June 19, 2022
Whale
It’s unclear who the whale is, but she was let down by protocol. She deposited this money under the pretense that they could take out a loan and do whatever they wanted. Now, the owners and the protocol have intervened in confiscating this privilege to protect the price of their token. Money talks, right? As you can see, the protocol is not a point-to-point, trustless protocol. Instead, it is a centralized lending platform that requires investors to trust homeowners and other users. The beams were not moved, but were completely dismantled. This is not decentralized finance. Instead, it’s very centralized finance.