What is better for a DeFi protocol: try and save its users from liquidations, or hurt its reputation for good?
The choice was not obvious for Solend, but it has finally made one – to the relief of the whole DeFi industry.
? Solend is a decentralized Solana-based lending platform that allows users to borrow stablecoins by depositing $SOL as collateral. However, if the price of $SOL goes down significantly and the deposited amount does nots suffice to cover the amount of stablecoins borrowed, a part of it (or all) is liquidated, i.e. sold on the market.
So far nothing extraordinary – that’s how most lending platforms work. In case of Solend, however, the trouble came from a whale who deposited 5.7 million $SOL ($212.8 million at current rates) to borrow $108 million. This deposit attracted attention not only because of its size (it represented 95% of total platform’s borrowings), but mainly because of the risks attached:
☠️ if the price of $SOL falls below $22.3, the protocol will start to liquidate it. Liquidation means a big amount of $SOL will be put on the market, increasing the selling pressure and driving the price lower. This would trigger more liquidations and create more selling pressure… until the falling price would cause other Solend users’ deposits to get liquidated as well.
Such perspective did not please the Solend team, who tried to contact the whale hoping to convince them to reduce their exposure. The whale did not respond, so Solend has came up with an extreme idea – temporarily modify the smart contract in order to take over the whale’s account and execute the liquidation OTC (over the counter), so that it does not affect the market. To implement it, Solend team has submitted a proposal to Solend DAO – a decentralized autonomous organization governing the protocol.
?️ The DAO voted in favour, but the community backlash was so quick and so impressive, that Solend did not get to execute this decision. A second vote overturning the first one was organized the following day, and this one resulted in re-establishing the status quo. Well, almost status quo: the future voting period was extended from 6 hours (a complete nonsense for a globally functioning DeFi protocol) to 24 (still not much, but better).
The main promise of DeFi is an independent (=decentralized) circuit for its users’ money, where the code is law and a centralized authority cannot meddle with it.
What Solend did amounts to putting a question mark on this promise: are users funds still safe in face of a DAO vote?
Solend DAO pulled back, but it is not sure the industry will forget it… On the bright side, however, other DeFi protocols – and their users – could learn the lesson and turn a more attentive eye to collateral requirements, protocol governance and DAO rules ?