👋 Do you want to work with us? CryptoSlate is hiring for a handful of positions!

Solend, a Solana-based lending platform with more than $1 billion in deposits, has voted on a government proposal to take over a whale’s account so the funds can be withdrawn rather than automatically settled on the open market. eerily. users have been incentivized to vote with “50K SLND proportionally distributed among voters via airdrop”.

Attempts to contact the owner

The proposal was launched on June 19, 2022 at 08:33 and approved at 15:45. This gave the whale only seven hours to view, read, and vote on the proposal. However, Solend had tried to contact the owner of the wallet several times in the past few days. The DeFi platform posted a message on Twitter and sent out an on-chain transaction with a memo that read:

“Maintaining user funds is Solend’s top priority. Please reduce your position so that your liquidation threshold is below $18.50 in the next 24 hours, or we will have to explore other options. Contact us in [email protected]”

Possible consequences for the market

The wallet accounts for 95% of the SOL deposit pool and 88% of USDC loans, making it the largest account by quite a margin. Due to market volatility, Solend is concerned that “if the SOL falls to $22.30, the whale’s account becomes liquidable for up to 20% of its loans (~$21 million).” Solend fears that a DEX market sell-off of this position will cause further disruption and:

“Could cause chaos, taxing Solana’s network. Liquidators would be especially active in spamming the liquidation function, which is known to be a factor in Solana’s downfall in the past.”

However, it is not unreasonable to think that a $21 million market sell-off on a blockchain with a market cap of $11 billion and a 24-hour trading volume of more than $2.1 billion should be absorbed. no “chaos”.

Mitigate bad debt for Solend

In fact, the Solend team announced that, in a “worst case scenario, Solend could end up with bad debt” as a justification for taking over a user’s account on a supposedly decentralized platform. An affirmative vote allows Solend to “temporarily take control of the whale account” to “mitigate risk.” The exact text of the proposal is shown below.

“Enact special margin requirements for large whales accounting for more than 20% of loans and grant emergency power of attorney to Solend Labs to temporarily take over the whale’s account so settlement can be executed OTC.”

Furthermore, Solend states that the “intention is to allow liquidation to be handled gracefully OTC with, say, a 3% slippage versus a DEX with a 46% slippage.” However, no information is known on how much of the OTC trade will be made public. The concern is that after 20% of the position is liquidated in a sell market order, Solana’s price could fall further and thereby crush other circuit breakers, leading to the liquidation of the position. Full $191 million position in Solana.

Also, since there is not enough liquidity to absorb the market order on any Solana DEX, Solend would end up with a net loss on his USDC loan. Currently, an exchange of $21 million of $SOL for $USDC would result in a price shock of 61%. SOL trades of more than $2 million appear to have a price impact of more than 10%. However, the problem is undoubtedly related to the Solend team’s mismanagement of not anticipating this when he initially took the position of the whale.

The proposal

The proposal has now passed, and thus the DAO has granted permission for a smart contract upgrade that allows Solend to take over the whale account. The options were to enact the “special margin requirement” or “do nothing.” There was no text suggesting more options or strategies that could be implemented; take control or do nothing. Users were also incentivized with an airdrop for voting on the proposal with only one course of action in mind. Solend didn’t ask users to vote ‘yes’ to claim the airdrop, but the ethics of the approach is certainly questionable.

To make matters worse, the governance platform was unable to accept incoming requests during the vote. Solend had to turn to Twitter once again to straight users to a mirror of the site while the governance platform was down. Regarding the mirror site, Solend tweeted,

“In general, be careful when visiting any site other than http://solend.fi. However, this is an exception.”

Asking users to visit a site unknown to them, and then saying, “This time it’s okay.” It sets a dangerous precedent. If your Twitter account were ever to be compromised, an attacker could now use the same language to potentially defraud members of the community.

The summary

The tragic nature of this story is absurd in its failure to follow proper security, governance, and financial management. Here is a summary of the situation and Solend’s actions;

He offered a loan that, if paid off, would leave him with “bad debt.” He used his first DAO governance proposal to take over a user’s account. He created a proposal with only 8 hours to vote on a Sunday morning. He paid users with native tokens to vote. the proposal Had its governance platform offline during the proposal Linked users to an unknown URL via Twitter to connect their wallets to vote Will now liquidate the user’s wallet by moving funds to an off-chain OTC block trade Establishes a precedent that DeFi platforms can take over your account if they see fit

DeFi stands for decentralized finance, and it’s hard to argue that taking over a user’s account is in keeping with the spirit of decentralization. Solend now uses one rule for one user and a different set of rules for everyone else. Furthermore, this user is an important whale in its ecosystem. If the wallet owner were to withdraw all their funds from Solend, the platform’s TVL would sink. Regardless of whether the move mitigates broader market risk, this is an example of how the wealthy are treated differently from other users.

Solend is treating this wallet special because of its value. The platform also announced that “there will be a grace period for 3oSE…uRbE to reduce their leverage by themselves”. Smaller account holders do not receive such a grace period, but again, their accounts are not taken over by the platform itself.

In contract FatManTerra commented,

“While this is a crazy and radical solution, and while it goes against the spirit of DeFi, it is probably one of the best options in terms of market impact and health of the protocol. Unfortunately, we don’t care about concentrated risks like a large whale count to the upside, only to the downside.”

Should a DeFi platform be able to take control of a user’s account in principle? Is Solend trying to protect the ecosystem or is he just changing the rules to save himself? The situation is undoubtedly a dangerous precedent for cryptocurrencies and could have a much broader impact as the bear market continues.

CryptoSlate contacted Solend and its founder, Rooster, but neither responded to requests for comment.

Obtain a Edge in the Cryptomarket 👇

Become a member of CryptoSlate Edge and get access to our exclusive Discord community, plus exclusive content and analysis.

chain analysis

Pricing Snapshots

More context

Join now for $19/month Explore all the benefits

This post Solend pays users to vote on the proposal to liquidate the OTC whale wallet and avoid “bad debts”

was published first on https://cryptoslate.com/solend-pays-users-to-vote-on-proposal-to-liquidate-whale-wallet-otc-and-avoid-bad-debt/


Write A Comment