According to the proposal, If SOL drops to $22.30, the whale’s account could be liquidated for up to 20% of their borrowings (around $21M). Solend states that the intent is to allow the liquidation to be handled gracefully via OTC. Critics say that taking over a user’s wallet will bring a bad reputation on the Defi space.
Leading Solana network-based lending platform Solend’s users voted on a governance proposal to take over a whale’s account via OTC trade. According to the proposal called “SLND1: Mitigate Risk From Whale,” If SOL drops to $22.30, the whale’s account becomes liquidatable for up to 20% of their borrows ( around $ 21M).”.
The proposal grants Solend Labs “emergency powers” to liquidate the whale’s vulnerable assets worth around $20 million in SOL via over-the-counter (OTC) trades instead of relying on decentralized exchanges. Voters were given approximately 7 hours to decide on the proposal. The options in the proposal were to enact the “special margin requirement” or “do nothing.” Voters were further incentivized with an offer of 50K SLND distributed proportionally through an airdrop.
What did Solend say ?
The wallet makes up 95% of the SOL deposit pool, and 88% of the USDC borrows. The current volatility of the crypto market has instilled fear in the minds of investors and lending platforms alike. Solend fears that a decentralized exchange market sell of this position would cause “chaos, putting a strain on the Solana network.” Solend further adds that liquidators would become more active and spam the liquidate function, which has been earlier known to be a factor causing Solana to go down.
Governance proposal SLND2 is live https://t.co/WVqjqaFPz5 — Solend (we’re hiring!) (@solendprotocol) June 20, 2022
As part of justifying the act of taking over a user’s wallet on a supposedly decentralized platform, Solend stated that at the worst case, it could end up with bad debt. Solend also claims the “intent is to allow the liquidation to be handled gracefully OTC with, example 3% slippage vs. on a DEX with 46% slippage.” However, the quantity of the OTC trade to be made public is yet to be revealed.
Implications of the Move and Criticism
Breaking into DeFi wallets is a heavily condemnable move in the Defi space. By carrying out this whale account takeover, many believe Solend is digging its own grave.
After 20% of the position is liquidated in a market sell order, Solana’s price could bleed more. This would eventually crash other circuit breakers leading to an unwinding of the entire $191 million Solana position. The lack of sufficient liquidity to absorb the market order on any Solana DEX, would mean that Solend has increased possibility of ending up with a net loss on its USDC loan.
This is pretty wild. The Solend team wants to take over the whale’s account and execute the liquidation themselves. The whale’s position is so degenerate that if SOL drops too low it will create cascading liquidations across the DEX books (and potentially bad debt). “DeFi” https://t.co/TEVKz18NSm pic.twitter.com/2A3t2fOhnl — FatMan (@FatManTerra) June 19, 2022
Solana’s unprecedented whale account takeover via OTC in fear of liquidation has received scathing criticism from crypto enthusiasts. Many argue that conducting liquidation through an OTC transaction goes against the principles of decentralization and self-sovereignty that DeFi is built on. Discussion and debates are already raging about how allowing Solend to take over users’ wallets would leave a huge black mark on the Defi space, which is relatively still in its early stages.
Many are also of the opinion that the issue is related to bad management from the Solend team in not anticipating the current situation when initially taking on the whale’s position. Solend’s capability to handle its own bad debt has also now come under scrutiny. Even after the whale account takeover, it remains to be seen if Solend would be saved from the brink of insolvency.