Solend, a Solana-based lending platform with more than $1 billion in deposits, has voted on a governance proposal to take over a whale’s account so funds can be withdrawn instead of being automatically liquidated on the open market. Disturbingly. users have been prompted vote with “50K SLND proportionally distributed among voters via airdrop”.
Attempts to contact the owner
The proposal was launched on June 19, 2022 at 8:33 a.m. and was adopted at 3:45 p.m. This gave the whale just seven hours to view, read and vote on the proposal. However, Solend had attempted to contact the owner of the wallet several times over the past few days. The DeFi platform posted a message on Twitter and sent an on-chain transaction with a memo saying:
“Guarding user funds is Solend’s top priority. Please reduce your position so that your liquidation threshold is below $18.50 within the next 24 hours, or we will have to explore other options. Contact us at [email protected]”
Potential fallout for the market
The wallet represents 95% of the SOL deposit pool and 88% of USDC borrowings, making it the largest account by some margin. Due to market volatility, Solend fears that “if the SOL falls to $22.30, the whale’s account will become liquidable up to 20% of its borrowings (~$21 million).” Solend is concerned that a sale of this position in the DEX market will cause further disruption and:
“could cause chaos, straining the Solana network. Liquidators are said to be particularly active in spamming the liquidation feature, which is known to have been a factor in Solana’s downfall in the past.
However, it is not unreasonable to think that a $21 million market sold on a blockchain with a market capitalization of $11 billion and a 24-hour trading volume of over $2.1 billion should be absorbed without “chaos”.
Mitigate bad debts for Solend
In fact, the Solend team announced that in “the worst case scenario, Solend could end up with a bad debt” to justify taking over a user’s account on a supposedly decentralized platform. A yes vote allows Solend to “temporarily take over the whale account” to “mitigate risk”. The exact wording of the proposal is shown below.
“Enact special margin requirements for large whales that represent more than 20% of borrowings and grant emergency authority to Solend Labs to temporarily take over the whale account so that liquidation can be executed over-the-counter.”
Further, Solend claims that “the intention is to allow the liquidation to be handled over-the-counter with, for example, a 3% slippage versus a DEX with a 46% slippage. Yet no information on how much of the OTC trade will be made public is not known.The problem is that after the liquidation of 20% of the position in a sell order in the market, the price of Solana could fall further and so breaking other circuit breakers, resulting in an unwinding of the entire Solana position of $191 million.
Additionally, since there is not enough 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 price impact of 61%. Transactions over $2 million SOL appear to have a price impact of over 10%. However, the problem is undoubtedly related to poor management on the part of the Solend team who did not anticipate this when taking the initial position of the whale.
The proposal is now passed, and as a result, the DAO has authorized a smart contract upgrade that allows Solend to support the whale account. The options were to adopt the “special margin requirement” or “do nothing”. There was no language suggesting other options or strategies that could be implemented; take control or do nothing. Users were also prompted by an airdrop to vote on the proposal with a single thoughtful plan of action. Solend didn’t ask users to vote “yes” to claim the airdrop, but the ethics of the approach are undoubtedly questionable.
To add to the dilemma, the governance platform was unable to accept incoming requests during the vote. Solend had to turn to Twitter again to direct users to a site mirror while the governance platform was down. Regarding the mirror site, Solend tweeted,
“In general, be careful when visiting a site that is not http://solend.fi. This is still an exception.”
Asking users to visit a site they don’t know, then say, “this time it’s okay.” This sets a dangerous precedent. If ever their Twitter account was compromised, an attacker could now use the same language to potentially defraud community members.
The tragic nature of this story is absurd in its failure to follow proper security, governance and financial management. Here is a summary of Solend’s situation and actions;
- Offered a loan that, if liquidated, would leave him with a “bad debt”.
- Used their very first DAO governance proposal to take over a user’s account
- Creating a proposal with only 8 hours to vote on a Sunday morning
- Users paying native tokens to vote on the proposal
- Had their governance platform offline during the proposal
- Users linked to an unknown URL via Twitter to connect their wallets to vote
- Will now liquidate the user’s wallet by transferring funds in an off-chain OTC block transaction
- This sets a precedent that DeFi platforms can take over your account if they deem it appropriate.
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 all others. Moreover, this user is an important whale in their ecosystem. If the wallet owner withdrew all of their funds from Solend, the platform’s TVL would crash. Whether or not this move mitigates broader market risk, this is an example of the wealthy being treated differently from the rest of the users.
Solend treats this wallet in a special way because of the value it holds. The platform also announced that “there will be a grace period for 3oSE…uRbE to reduce its leverage on its own”. Small account holders do not benefit from said grace period, but again, their accounts are not supported by the platform itself.
Under FatManTerra contract commented,
“Although this is a crazy and radical solution, and even if it goes against the DeFi philosophy, it is probably one of the best options in terms of market impact and protocol health. Unfortunately, we don’t worry about concentrated risk like a big upside whale count – only downside.
Should a DeFi platform in principle be able to take control of a user’s account? Is Solend trying to protect the ecosystem or just changing the rules to save itself? The situation is undoubtedly a dangerous precedent for crypto and one that could have a much broader impact as the bear market continues.
CryptoSlate contacted Solend and its founder, Rooster, but neither responded to our requests for comment.