Solend, Solana-based Lending Service, Issued Governance Votes Against Whales to Avoid Chaotic Liquidation.

2022-07-07, 01:40

Solend, a lending and borrowing protocol on Solana, voted on its debut proposal on Sunday. The vote was a proposal to assume control of a user’s account under the guise of protecting the network from collapsing into bad debt. Solend’s takeover would allow it to liquidate the whale’s account through over-the-counter transactions, rather than allow DEX trading. That was because a DEX liquidation would potentially cost the lending protocol about 21 million in bad debt.

The account in question holds 95% of SOL stake in the protocol’s major pool, which makes it at risk of being liquidated if SOL prices fall below $22.30. The Solend network anticipates that such a liquidation event would not only impact the borrowing protocol but the Solana blockchain would also be hit as well.

To mitigate such a risk, the platform proposed the vote, which was voted “yea” by 97.5% of token-holders. Interestingly, this stakes percentage barely managed to clear the quorum of 1% at 1.13% share because of a single account.

However, the crypto community vehemently criticized the move as a violation of the principles of Decentralized finance. Especially since The governance vote took place within a short space of 8 hours only and on a Sunday morning. The dissenters believe the ‘whale account’ was not given enough time to respond to the vote.

In its defense, The Solana-based protocol announced that all attempts to reach the whale account on-chain and through Twitter and get them to reduce their position proved abortive. However, as a response to the online controversy, Solend submitted another vote on Monday to reverse the first vote and look for another solution. This time, the vote passed by a landslide of 99%. For further details on this news, read to the end.

The First Governance Proposal.

By a 97.5 percentage vote, Solana-based Solend passed a proposal, SLND1, to effect a temporary take-over of one of its users' accounts.

Source: Storm Gain

The account suspected to be a whale account dominates the DAOs liquidity pool by a massive gap. The whale had deposited 5.7 million SOL on the service as collateral to borrow $108 million in stablecoins. This position makes that single account able to make or break the entire service and Solana if it is liquidated on-chain.

Due to this, Solend is in a risky position, since if the price of SOL dropped to $22.30, the whale account would have to be liquidated. A situation that could spiral into $21 million bad debt amidst the present crypto bear market.

All Attempts to Reach and Warn The Whale Account Proved Abortive.

At the time of the vote, SOL was already trading below $34.

Several attempts to warn the affected user on-chain and by tweets to reduce their position and mitigate liquidation risks received no response. Hence, the governance proposal, which went thus:

Yes: to execute a unique gap condition for large accounts of up to 20% of borrows, giving Solend the right to temporarily override the whale account and execute OTC liquidation.

No: to take no action.

Essentially, the proposal seeks to grant the lending service the right to commandeer the whale’s account and liquidate the contents in over-the-counter transactions. This would circumvent the damage automatic liquidation which typically takes place on DEXs would normally cause.
The vote went live on Sunday morning and was passed by the evening of that same day. It garnered 97.7% yeas, which made up only 1.13% of Solend stakes, a percentage that nearly did not meet the network’s 1% quorum. A single vote was what eventually made the difference.

Source: Twitter

Controversy Surrounds the Proposal.

However, Solend’s actions raised a furor of controversy among the crypto community. Many believed that the governance decision constitutes a violation of the ethos of decentralized finance. This vote, the controversy claims, sets a negative precedent, seeing as it was the first vote ever on the Solend platform.

A New Vote.

Consequently, the Solend team announced their acknowledgment of the crypto community’s criticism and staged another governance vote to reverse SLND1. The new proposal SLND2 will buy time to explore other avenues for solving the liquidity problem. SLND2 received a resounding yes victory of 99.8%, a single wallet accounting for 90% of the total after purchasing extra stakes worth $700,000.

Additionally, the Solend team prolonged the voting time to a full day, acknowledging that the time was indeed short. However, in the post by co-founder, Rooter, he stressed the need for rapid action in the face of the very real risk. Notwithstanding the restriction, this situation caused regular account holders in withdrawing stablecoins.

A Quick Revision Of The Facts.

The Solana-based lending and borrowing service, in a bid to salvage the liquidation risk situation it is in, has passed two opposing votes. The first was a vote to assume control of a whale account on the network to avoid its liquidation and save the network from crashing. However, the protocol voted to overturn its decision after it became controversial. The Solend team is currently seeking alternative solutions to the situation.

Author: Gate.io Observer: M. Olatunji
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