Solend backtracks on ’emergency power’ proposal following community backlash
Solend says the recent price recovery of SOL has given them some time to get more feedback and also seek new alternatives.
Solana-based decentralized finance protocol Solend backtracked on its initial proposal to take over a whale’s wallet by allowing users to vote on whether it should proceed or find another solution.
The decision was made after the crypto community extensively criticized its initial proposal, which would have raised questions about its ‘decentralization.’
Meanwhile, the new proposal SLND2 has three implications: it will invalidate the first proposal, extend the voting period to a full day, and initiate a new, less encroaching way to solve the whale wallet crisis on the protocol.
According to the developers, the recent price recovery of SOL has given them some time to get more feedback and seek new alternatives.
However, the voting period is just a day because they believe there is a need to act fast and address the system risk.
The risk here is that 20% of the whale’s wallet could get liquidated if SOL’s price should fall to $22.30.
The liquidation will amount to around $20 million in bad debts, and developers worry that this could cause too much sell pressure on Solana.
And such an event could even lead to a network failure.
While Solend developers believe they are acting in the best interest of the protocol, members of the crypto community are questioning its claims of decentralization.
According to Ava Labs founder Emin Gun Sirer, Solend developers have essentially gone the route of traditional finance and centralization by not allowing the contract to play out.
Another crypto community member, Dylan LeClair, declared that Solend is “decentralized” in name only, and their actions are an “absolute comedy.”
The general counsel at Delphi Digital, Gabriel Shapiro, said the action is illegal and contrary to the ethos pushed by DeFi.
FatMan Terra also said the action would be a bad precedent and break trust in the team.
However, in its defense, the Solend team said it tried reaching out to the whale wallet owner to request lowering the liquidation threshold to $18.50.
Solend pays users to vote on proposal to liquidate whale wallet OTC and avoid “bad debt”
Solana based lending platform Solend has offered users tokens in reward for voting on a proposal to take over a whale's account holding 95% of their Solana deposits.
Solend, a Solana-based lending platform with over $1 billion in deposits, has voted on a governance proposal to take over a whale’s account so that funds can be withdrawn instead of automatically liquidated on the open market. Disturbingly. users have been incentivized to vote with “50K SLND distributed proportionally among voters through an airdrop.”
The proposal was launched on June 19, 2022, at 08:33 AM and was passed by 3:45 PM. This gave the whale only seven hours to view, read and vote on the proposal. However, Solend had attempted to communicate with the wallet owner numerous times over the past few days. The DeFi platform put a message on Twitter as well as sent an on-chain transaction with a memo saying:
“keeping users funds is Solend’s top priority. Please reduce your position such that your liquidation threshold is under $18.50 in the next 24 hours, or we’ll have to explore other options. Contact us at security@solend.fi.”
Potential fallout for the market
The wallet makes up 95% of the SOL deposit pool, and 88% of the USDC borrows, making it the most significant account by quite some margin. Due to the volatility in the market, Solend is concerned that “If SOL drops to $22.30, the whale’s account becomes liquidatable for up to 20% of their borrows (~$21M).”
Solend fears that a DEX market sell of this position would cause further disruption and:
“could cause chaos, putting a strain on the Solana network. Liquidators would be especially active and spamming the liquidate function, which has been known to be a factor causing Solana to go down in the past.”
However, it is not unreasonable to think that a $21 million market sell on a blockchain with an $11 billion market cap and a 24-hour trading volume of over $2.1 billion should be absorbed without “chaos.”
Mitigate bad debt for Solend
In fact, the Solend team announced that in “the worst case, Solend could end up with bad debt” as a justification for taking over a user’s account on a supposedly decentralized platform. A yes vote allows Solend to “temporarily take over the whale’s account” to “mitigate risk.” The exact wording from the proposal is shown below.
“Enact special margin requirements for large whales that represent over 20% of borrows and grant emergency power to Solend Labs to temporarily take over the whale’s account so the liquidation can be executed OTC.”
Further, Solend claims the “intent is to allow the liquidation to be handled gracefully OTC with, e.g., 3% slippage vs. on a DEX with 46% slippage.”
Yet, no information on how much of the OTC trade will be made public is known.
The concern is that after 20% of the position is liquidated in a market sell order, the price of Solana could drop further and thus smash other circuit breakers leading to an unwinding of the entire $191 million Solana position.
Further, given that there is insufficient liquidity to absorb the market order on any Solana DEX, Solend would end up with a net loss on its USDC loan.
Currently, a $21 million swap of $SOL for $USDC would result in a 61% price impact. Trades over $2 million SOL appear to have a price impact of over 10%. However, the issue is undoubtedly related to bad management from the Solend team in not anticipating this when initially taking on the whale’s position.
The proposal has now passed, and therefore, the DAO granted permission for a smart contract upgrade that allows Solend to take over the whale’s account.
The options were to enact the “special margin requirement” or “do nothing.” There was no language suggesting further 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 thought-out course of action. Solend did not request users vote ‘yes’ to claim the airdrop, but the ethics of the approach are undoubtedly questionable.
To add to the dilemma, the governance platform could not accept incoming requests during the vote. Solend had to take to Twitter once again to direct users to a mirror of the site while the governance platform was down. Regarding the mirror site, Solend tweeted,
“In general be careful about visiting any site that’s not http://solend.fi. This is an exception though.”
Asking users to visit a site unknown to them but then say, ‘this time it’s ok.’ It sets a dangerous precedent.
Should their Twitter account ever get compromised, an attacker could now use the same language to defraud community members potentially.
