On June 19, the Solend team launched a controversial proposal on its governance portal. The proposal highlighted a whale account — the largest user on Solend — and why this whale was causing risk to the protocol and Solend users. This proposal triggered widespread criticism from the crypto community.
What is Solend?
Solend is a lending protocol governed by decentralized autonomous organization Solend DAO, on the Solana blockchain. On Solend, users can lock SOL as collateral and borrow stablecoins like USDT and USDC. The price of stablecoins normally does not change but SOL is subjected to price fluctuations. If SOL price drops and the collateral value is lower than the loan value, the SOL in the collateral will be liquidated to pay the loan. This mechanism was what triggered the recent Solend drama.
At that time, crypto prices were hitting new lows, impacted by the bear market. If SOL had fallen below $22.30, up to 20% of the whale’s collateral (~$21 million) would have been liquidated. However, liquidations usually occur via market sells on decentralized exchanges and the market may not be able to absorb such a huge amount at once. The whale's liquidation would have led to bad debts in Solend and started a negative cascade: Solend depositors would withdraw their deposits, drying up the lending pools and causing other depositors to be unable to withdraw their collateral. During this process, the Solana blockchain would also face congestion.
Credits: Solend, SLND1 Proposal
The aim of this proposal was to take control of the whale’s account and conduct the liquidation through an over-the-counter (OTC) transaction. Perhaps driven by fear, the proposal was approved with a 97.5% passing rate.
Why is this controversial?
The aim of the proposal is clear. Solend was trying to ensure smooth execution of liquidation, avoid bad debts and systemic risks, and protect the interest of other users. However Solend, being a non-custodial DeFi protocol, ironically sought to dominate an individual’s assets, directly contradicting a core principle of DeFi - decentralization. Standing in the whale’s shoes, this proposal was a violation of his rights.
The public quickly found out and criticized this action. As voting power is highly associated with Solend’s native token (SLND), if this proposal was executed, other SLND big holders could theoretically go through the same process to take control of other accounts.
Luckily, the market recovered a bit and SOL price rebounded. Amid public criticism, Solend created a second proposal. It invalidated the first proposal and increased the voting time to encourage the community to actively engage in governance.
Credits: Solend, SLND2 Proposal
A third proposal then introduced a per-account borrow limit of $US50 million. It would also gradually liquidate positions of anyone who has a debt above this limit regardless of their collateral value, until the borrowed amount reaches $US50 million. While this proposal looks viable, and the whale has reportedly also started moving funds to reduce risk of massive liquidation, the team has already lost much credibility in the last few days.
Credits: Solend, SLND3 Proposal
Solend was lucky. The market gave the Solend team precious time to reconsider their solution for this massive liquidation problem. But what if SOL price had dropped below $22.30? Would the first proposal have been carried out as there were no other contingency plans? Risk management is obviously not sufficient in today’s DeFi projects.
Additionally, the second proposal was created just one day after the first, but their results were completely at odds. It seems that the DAO consensus can change quickly. Take a look at the voting power distribution for both proposals and we can see that the end results were affected by a single account (holding large numbers of SLND). This shows a huge gap in terms of voting power. Designing a fair DAO voting mechanism should be a key consideration.
Lastly, as of June 21, there are 192 members in the DAO versus 11,000 SLND holders. Increasing community engagement is another key consideration for a DAO and its associated project to develop further.
The views expressed in this article are the author's alone and do not necessarily represent the views of ApolloX.
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