DeFi: Solend’s DAO will skin a whale

We will talk in this article about a huge blue whale, swimming in the ocean of Solenda platform of decentralized finance On Solana. Its position of more than 100 million dollars risk the liquidation. Problem: represents 95% of the FLOOR from the protocol reserve and the whale disappeared into the deep waters.

Solend is a loan (and loan) protocol – a DEX for close friends. Users can carry out financial transactions there, thanks to the Cash available in its digital safes, the swimming pools.

Decentralized finance and yours swimming pools liquid assets

Unlike traditional centralized platforms, these protocols Challenge they are not based on order books. Solendhow Oscillation Where is it Ave use a automated market maker (BUT). This algorithm it replaces the traditional market makers and order books. Liquidity is provided by the users themselves – liquidity providers.

When a user loan funds (eg stable coins), must place collateral higher capital (eg FLOOR). The rules of over-guarantee and the Rate it are fixed by the protocol. In the event that a borrower defaults, his collateral is automatically liquid. In addition to the refund, he will also have to pay sanctions of liquidation.

If a user deposits cryptocurrency as collateral, its value will fluctuate. Its price must therefore not fall below a certain price in order to guarantee the report of collateralisation. In such event, the position will be gradually liquidated.

Solend’s main pool

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Solend’s (too big) whale

Our whale used Solend to borrow 108 million dollars (in USDC And USDT). To do this, he filed an application 5.7 million of TERRA in the pool corresponding. It still represents 185 million dollars at current rate – 4 Rafale planes, or a nice vacation home in Aspen. Its liquidation price is like that $ 22.30. The problem is that this whale’s position is really huge:

  • 25% of the Total value locked (TVL) from Solend;
  • 95% cash deposited in the pool of FLOOR ;
  • 88% of the USDC borrowed from pool corresponding.

On a DEX like Solend, the liquidators generally use robot. The latter sell the collateral to cover a defaulting position to market price. The AMM must therefore have sufficient liquidity to absorb the impact of the transaction on the price of the asset.

If the price of SOL reaches $ 22.30, our whale will have to liquidate 20% of its loansthis is 21 million dollars. Unfortunately, this is too much. The total liquidity of swimming pools do not allow this operation to take place without collateral damage.

In fact, the price functions of the algorithms depend on the relationship between the different ones reservations lent and borrowed assets. Such a liquidation would push these functions to the limit. It is also possible that liquidity is cascaded and that the swimming pools interested parties are debtors.

Solana, instability and FUD

Furthermore, the risk ofinstability for the network Solana in itself it is strong (seen several times in the past) … The horde of liquidators spamming the corresponding function on the network could in fact cause it traffic congestion.

L’announcement from the developers of Solend scared many users, who withdrew their funds from the pools. USDT and USDC reserves are now fully used. Therefore, liquidity providers can no longer withdraw their stablecoins and it is impossible to liquidate guaranteed positions in USDT or USDC.

The concern of the Solend team

Of course, the developers first tried to get to the famous whale. The account owner did not have no activity in chain ever since 12 days. Solend’s team then used Twitter to send him a message, as did Solana’s own blockchain, but without reacting.

Loan rates for USDT and USDC have been automatically adjusted (63% and 94% at the time of writing, USDT recovered 600%).

To overcome the problem of liquid assets, the Solend team explored various options. For example, it is considering liquidation on the counter (OTC). It is about doing it “by hand”, with market makeror trying to find liquidity through various mechanisms.

Without a response from the account owners, the Solend team implicitly expressed their desire to do sointervene directly on the offending account.

Indeed, after consulting with its investors and users, it is accepted that this whale runs a systemic risk to all users, in letting himself be liquidated “.

You don’t have to be a financial and mathematical genius to understand that a liquidation of this size is a lot risky, given Solend’s reservations. Furthermore, the spam frantic liquidators, attracted by the smell of blood, will not help the stability of the Solana blockchain, and therefore to the efficiency of the operation.

Proposal

As the team spokesperson rightly stated, there is no good solution. Their proposal is heavy with consequences and significance:

  • Edit the settlement threshold whales accounting for more than 20% of the loans of the pool principal (35%);
  • Giving exceptional powers to Solend Labs for to take control of the tale of the whale.

To run the liquidation of the OTC accountthe Solend team will have to indulge “emergency powers” by modifying the smart contract of the protocol. Powers that would be temporary and revoked once the account reaches a mitigated risk level.

A vote was thus offered to Solend users:

  • Yes”: To intervene manually and take control of the whale’s account;
  • No “: Do absolutely nothing.
Developers of Solend, a decentralized finance platform on Solana, have submitted a proposal to vote DAO to take control of a whale's account

The user community voted positively 97.5% for’involvement of developers.

Isn’t finance that decentralized?

These votes are supported by a number of tokens SLND representing only a weight of $ 769,000, very little compared to the sums involved in the present case. This approval was quickly derided by many commentators … Indeed, it undermines the ideal of decentralized finance. This is also the first governance proposal for Solend.

It’s a fundamental decision, like the famous fork ofEthereum, when violating TheDAO’s contract. The sums involved were also of the same order; the direct intervention of the developers – to prevent the hacker from pocketing the theft of him – had been overwhelmingly approved by the network.

Furthermore, this case shows us the technical limits of the BUT. While they have the advantage of allowing us peer-to-peer exchange, they have flaws in terms of accessibility Cash and’capital efficiency. During high volume operations, the slip (the difference between the trade execution price and the expected price) can be huge. Solend’s team talks about 46% for such a liquidation, compared to 0.3% in progress market maker OTC.

DeFi needs to find models of price formation more efficient, but also settlement mechanisms solid, even inside extreme market conditions. About government of these systems, if your funds had been threatened by a slightly degenerate whale, you would have voted “no” for ideal decentralization ?

Update: Solend invalidates the first vote

Faced with the influx of criticism regarding the first vote, Solend’s team proposed to do soto cancel the proposal and to extend the voting period for one more day.

The rebound in the price of FLOOR is invoked as a reason to give Solend’s team time to look for alternatives to taking charge of the whale. The short duration of the vote is justified by the impossibility for users of the pool from USDC to withdraw their funds. This proposal was new approvedthis time over $ 1 million in SLND tokens:

So the Solend soap opera isn’t over!

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