DeFi turning on itself amid market panic

1 week ago 5

There person been immoderate worrying trends successful crypto recently, but 1 successful peculiar caught my oculus past week. Solend, the lending level based connected Solana, passed a authorities ballot to instrumentality implicit a backstage wallet.

The backstage wallet (referred to henceforth arsenic the “whale”) deposited 5.7 cardinal SOL, presently worthy $200 million, onto the lending platform. Against this position, the whale borrowed $108 cardinal of stablecoins. The 5.7 cardinal SOL tokens comprised implicit 95% of full deposits connected the platform.

The occupation arose erstwhile the Solana terms tanked alongside the wider market, reducing the worth of the whale’s collateral drastically and bringing into play a imaginable liquidation scenario. In this event, the marketplace would beryllium flooded and perchance crater the worth of the Solana token.

“In the worst case, Solend could extremity up with atrocious debt,” Solend said. “This could origin chaos, putting a strain connected the Solana network.”

Consequences of liquidation

Plotting this magnitude of SOL against the trading measurement highlights however overmuch of an interaction this would person connected the market, with trigger effects of bots connected DEXs apt further exacerbating the downward unit caused should this wallet flood the market.

The liquidation terms of the indebtedness is $22.27, which would request a 35% autumn from existent prices to beryllium triggered. While this is simply a important decline, Solana is down 80% this twelvemonth unsocial and a 35% autumn from present is acold from inconceivable – and it came precise adjacent arsenic Solana dipped past week to $25.

The protocol attempted to scope the whale and entreaty for them to apical up the loan, but determination was vigor silence, with the wallet inactive for astir 2 weeks. So, a ballot passed and the protocol voted to temporarily instrumentality implicit the whale’s wallet and trim hazard to the protocol.

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

2/ a whale has a monolithic presumption of $170M SOL deposited and $108M stables borrowed. they're presently 95% of the SOL deposits and 86% of USDC borrowshttps://t.co/Xp7Xym5LQt

— Rooter | Solend (hiring!) (@0xrooter) June 18, 2022

Since then, the whale transferred $25 cardinal to Mango markets, limiting the demolition that would caused connected Solend should the liquidation trigger.

3oSE…uRbE has acted connected our proposition to dispersed their presumption crossed lending venues (decentralized and centralized) arsenic a archetypal step.

So acold they've moved $25M USDC indebtedness to @mangomarkets

This shows committedness to moving things retired and solves Solend's USDC utilization problem.

— Solend (we're hiring!) (@solendprotocol) June 21, 2022

However, portion that lessens the vulnerability of the Solend protocol, the liquidation menace does inactive remain, meaning Solana is precise overmuch connected edge.

But let’s halt to deliberation astir this for a second.

Precedent

I recognize the protocol didn’t extremity up taking implicit the wallet due to the fact that the wallet withdrew independently, but the ballot passed and that was the plan. It should besides beryllium noted that pursuing aggravated backlash connected Twitter, different ballot passed connected Solend to overturn the earlier vote.

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

And with the precedent set, wherever is the enactment drawn? Whose accounts could perchance beryllium taken over? Can bigger accounts radical unneurotic to instrumentality implicit smaller accounts and siphon disconnected their funds? Can the protocol owners assertion assets from wallets if they deem them to beryllium acting successful a mode inconsistent with their vision?

The world is that everything is imaginable due to the fact that it is centralised, and a unsafe precedent has been set. Ironically, it’s fundamentally the biggest crushed for the invention of cryptocurrency successful the archetypal spot – combatting the dangers of centralisation. If Bitcoin laminitis Satoshi Nakamoto is retired determination somewhere, he/she indispensable beryllium recoiling successful horror.

New ballot thought — alternatively of liquidating the solend whale, everyone that votes yes to this connection gets to support the whales’ funds instead. Solend volition person a batch of atrocious indebtedness but the token holders that voted yes volition beryllium rich. lfg!

— Cobie (@cobie) June 19, 2022

Whale

It’s not wide who the whale is, but they person been fto down severely by the protocol. They deposited that wealth nether the guise that they could instrumentality retired a indebtedness and bash what they wanted. Now, the owners and protocol person stepped successful the confiscate that privilege successful bid to support the terms of their token. Money talks, huh?

 As it turns out, the protocol is not a peer-to-peer, trustless protocol. Instead, it is simply a centralised borrowing level that requires investors to spot the owners and different users. The goalposts haven’t been moved, but alternatively they person been wholly dismantled.

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

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