Tuesday, February 27, 2024

DeFi turning on itself amid market panic

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There have been some worrying trends in crypto recently, but one in particular caught my eye last week. Solend, the lending platform based on Solana, passed a government vote to take over a private wallet.

The private wallet (referred to henceforth as the “whale”) deposited 5.7 million SOL, currently worth $200 million, onto the lending platform. Against this position, the whale borrowed $108 million of stablecoins. The 5.7 million SOL tokens comprised over 95% of total deposits on the platform.

The problem arose when the Solana price tanked alongside the wider market, reducing the value of the whale’s collateral drastically and bringing into play a potential liquidation scenario. In this event, the market would be flooded and potentially crater the value of the Solana token.

“In the worst case, Solend could end up with bad debt,” Solend said. “This could cause chaos, putting a strain on the Solana network.”

Consequences of liquidation

Plotting this amount of SOL against the trading volume highlights how much of an impact this would have on the market, with trigger effects of bots on DEXs likely further exacerbating the downward pressure caused should this wallet flood the market.


The liquidation price of the loan is $22.27, which would need a 35% fall from current prices to be triggered. While this is a substantial decline, Solana is down 80% this year alone and a 35% fall from here is far from inconceivable – and it came very close as Solana dipped last week to $25.


The protocol attempted to reach the whale and appeal for them to top up the loan, but there was radio silence, with the wallet inactive for nearly two weeks. So, a vote passed and the protocol voted to temporarily take over the whale’s wallet and reduce risk to the protocol.

After taking over the wallet, the plan was to liquidate the whale via over-the-counter transactions, rather than risking cascading contagion by liquidating on-chain via the automatic mechanisms.

Since then, the whale transferred $25 million to Mango markets, limiting the destruction that would caused on Solend should the liquidation trigger.

However, while that lessens the vulnerability of the Solend protocol, the liquidation threat does still remain, meaning Solana is very much on edge.

But let’s stop to think about this for a second.


I understand the protocol didn’t end up taking over the wallet because the wallet withdrew independently, but the vote passed and that was the plan. It should also be noted that following intense backlash on Twitter, another vote passed on Solend to overturn the earlier vote.

But this is exactly the opposite of what cryptocurrency is meant to be: decentralised, censorship-resistant and trustless.  

And with the precedent set, where is the line drawn? Whose accounts could potentially be taken over? Can bigger accounts group together to take over smaller accounts and siphon off their funds? Can the protocol owners claim assets from wallets if they deem them to be acting in a manner inconsistent with their vision?

The reality is that everything is possible because it is centralised, and a dangerous precedent has been set. Ironically, it’s essentially the biggest reason for the invention of cryptocurrency in the first place – combatting the dangers of centralisation. If Bitcoin founder Satoshi Nakamoto is out there somewhere, he/she must be recoiling in horror.


It’s not clear who the whale is, but they have been let down badly by the protocol. They deposited that money under the guise that they could take out a loan and do what they wanted. Now, the owners and protocol have stepped in the confiscate that privilege in order to protect the price of their token. Money talks, huh?

 As it turns out, the protocol is not a peer-to-peer, trustless protocol. Instead, it is a centralised borrowing platform that requires investors to trust the owners and other users. The goalposts haven’t been moved, but rather they have been completely dismantled.

This isn’t decentralised finance. Instead, it’s still-very-much-centralised-finance.


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