In a falling market, Solend is struggling with a “whale” whose position could be liquidated if the cryptocurrency solana dips below $ 22.30.
An event in the world of decentralized finance (DeFi) is disrupting the entire ecosystem. Recall that DeFi is an open financial system, accessible to any user, which allows you to carry out some traditional finance operations, such as loans.
To date, investors’ eyes are on the Solend lending protocol, which is currently in turmoil. Recall that the loan is a cryptocurrency loan granted to a borrower against interest. The Solend protocol therefore allows its users to deposit funds and in exchange for these funds they can take out loans to invest in the market.
These are collateralisation loans, which means that a user can actually borrow money by “pledging” another asset (other cryptocurrencies), what is called a collateral. If the value of this asset falls below a certain predetermined level, part or all of its position is liquidated.
“Solana could end up with bad debts”
What happened with the Solend protocol? An anonymous user deposited 5.7 million solanas (equivalent to $ 170 million) to borrow $ 108 million of USDC and USDT stablecoins from Solend’s main liquidity pool, which has 16 liquidity pools. Its loan alone accounts for 95% of solana’s deposits in this pool and 88% of USDC. This makes him a “whale”, meaning an actor who holds a lot of cryptocurrencies in a given location and who can have a huge weight on the market.
However, a portion of its position (20% of the total) will have to be liquidated if the solana cryptocurrency drops below $ 22.30. Indeed, in the context of a sharp decline in cryptocurrencies, the solana cryptocurrency underwent several price changes last week, dropping as low as $ 27.
“If the solana cryptocurrency drops below $ 22.30, the whale account is liquidated for up to 20% of its loans (~ $ 21 million). It would be difficult for the market to absorb such an impact as liquidators usually sell on decentralized exchanges (DEX). At worst, Solend could end up with bad debt. This could wreak havoc, putting a strain on the Solana network. The liquidators would be particularly active and spam the settlement feature, which is known for be a factor that caused Solana to fall in the past. Due to the associated risks, many users have given up, resulting in an increase in the utilization rate. “USDC and USDT in the main pool at 100%. This means that depositors cannot withdraw and positions guaranteed by USDC or USDT cannot be liquidated, ‘the team said on Sunday. and the Solend protocol.
As the principle of decentralized finance requires, many actors monitor – through bots – the various blockchains in search of defaulted loans to be liquidated: therefore, if a cryptocurrency falls below a certain threshold (here $ 22.30), the latter they then make sure that the accounts of the protocols are sound. In decentralized finance, in case bots liquidate the loan, they would have to resell the decentralized exchange (DEX) collateral.
However, “on Solana, the DEXs do not have sufficient liquidity to support the sale, so this would have resulted in a steep drop in the price of the solana cryptocurrency, and therefore those who say drop, say new liquidations, and thus potentially other mass liquidations within the DeFi “, explains to BFM Crypto Renaud Heitz, journalist of the specialized media Journal du Coin.
“A decision that goes against decentralized finance”
Against this background, the developers of the Solend protocol, who failed to get news from the user despite a message on Twitter, got their community voted on Sunday so they could take control of this user’s location. This proposed vote, which lasted six hours, was accepted.
However, this decision has been the subject of numerous criticisms on social networks, because it is contrary to the DeFi system.
“The Solend protocol wanted to take over the management of a user’s funds, resell them to an actor in exchange for the borrowed amount and put it back into the protocol. However, it is not up to them to make this decision. If the liquidation risk is real, it is decision goes against the very system of decentralized finance “, continues Renaud Heitz.
Faced with much criticism, Solend therefore did not liquidate the user’s position and put forward a new voting proposal, with the aim of canceling the old proposal. This new proposal was accepted on Monday morning, bringing the situation back to square one. The developers of the Solend protocol are therefore looking for new options to solve the problem.
The eyes of individuals and investors are therefore focused on this loan protocol, which in the next few hours will have to find solutions to deal with a potential liquidity crisis.
“At this stage the users’ funds are not at risk, only the people who have borrowed on the protocol can see their loans liquidated in the event of a cascade liquidation. We are therefore awaiting news of this new vote, to know the new alternatives. They could appeal to players able to keep the Solana system healthy or the protocol could use part of its liquidity to avoid the cascade of liquidations “, concludes Renaud Heitz.
At 12:15 pm, the price of the solana cryptocurrency is around $ 34.