We will talk in this article about a huge blue whale, swimming in the ocean of Solenda platform of decentralized finance on Solana. Its position of more than 100 million dollars risk the liquidation. Problem: it represents 95% of the FLOOR from the protocol reserve, and the whale disappeared into deep waters.
Solend is a lending (and borrowing) protocol – a DEX for the close friends. Users can carry out financial transactions there, thanks to the cash available in its digital safes, the pools.
Decentralized finance and its pools liquidity
Unlike traditional centralized platforms, these protocols Challenge are not based on order books. Solendas Swing Where Aave use a automated market maker (MA). This algorithm replaces traditional market makers and order books. Liquidity is provided by the users themselves – liquidity providers.
When a user borrow funds (for example stablecoins), he must place collateral higher capital (for example FLOOR). The rules of over-collateralization and the rate are fixed by protocol. In the event that a borrower defaults, its collateral is automatically liquid. In addition to reimbursement, he will also have to pay penalties of liquidation.
If a user deposits cryptocurrency as collateral, its value will fluctuate. Its price must therefore not fall below a certain price, in order to guarantee the ratio of collateralization. If so, the position will gradually be liquidated.
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The (too big) whale of Solend
Our whale used Solend to borrow 108 million dollars (in USDC and USDT). To do this, she filed 5.7 million of GROUND in the pool corresponding. It still represents 185 million dollars at the current rate – 4 Rafale planes, or a nice vacation home in Aspen. Its liquidation price is thus $22.30. The problem is that the position of this whale is really huge:
- 25% of the Total Value Locked (TVL) from Solend;
- 95% cash deposited in the pool of FLOOR ;
- 88% of the USDC borrowed from the pool corresponding.
On a DEX like Solend, the liquidators generally use robots. The latter sell the collateral covering a defaulting position to the market price. The AMM must therefore have sufficient liquidity in order to absorb the impact of the operation on the price of the asset.
If the price of SOL reaches $22.30, our whale will have to liquidate 20% of its loansthat is 21 million of dollars. This is unfortunately far too much. The total liquid assets of pools do not allow this operation to be carried out without collateral damage.
Indeed, the price functions of the algorithms depend on the ratio between the different reservations loaned and borrowed assets. Such a liquidation would push these functions to their limits. It is even possible that liquidity will be drained in cascade, and that the pools concerned find themselves debtors.
Solana, instability and FUD
Moreover, the risk ofinstability for the network Solana itself is strong (seen several times in the past)… The horde of liquidators spamming the corresponding function on the network could indeed cause its engorgement.
L’announcement from the developers of Solend scared away many users, who withdrew their funds from the pools. USDT and USDC reserves are now fully utilized. Thus, liquidity providers can no longer withdraw their stablecoins, and it is impossible to liquidate positions collateralized in USDT or USDC.
The concern of the Solend team
Of course, the developers first tried to reach the famous whale. The account owner did not have no activity on-chain since 12 days. The Solend team therefore used Twitter to send a message to him, as well as the Solana blockchain itself, but without reaction.
Borrowing rates for USDT and USDC have been automatically adjusted (63% and 94% at time of writing, USDT fetched 600%).
In order to overcome the problem of liquidity, the Solend team explored various options. For example, it is considering liquidating over the counter (OTC). It is a matter of doing it “by hand”, with market-makersor trying to find liquidity through various mechanisms.
Without a response from the owner(s) of the account, the Solend team has implicitly expressed its wish tointervene directly on the offending account.
Indeed, after consultation with its investors and users, it is accepted that this whale runs a systemic risk to all users, in allowing itself to be liquidated “.
You don’t have to be a financial and mathematical genius to understand that a liquidation of this size is very risky, given Solend’s reservations. Moreover, the spam frenzied liquidators, attracted by the smell of blood, will not help the stability of the Solana blockchain, and therefore to the efficiency of the operation.
As the team spokesperson so aptly puts it, there is no good solution. Their proposal is heavy with consequences and meaning:
- Modify the liquidation threshold whales which represent more than 20% of borrowings from the pool major (35%);
- Giving exceptional powers to Solend Labs for take control of the whale’s account.
In order to perform the liquidation of the OTC accountthe Solend team will have to grant itself “emergency powers” by modifying the smart contract of the protocol. Powers that would be temporary, and revoked once the account reaches a mitigated level of risk.
A vote was thus offered to Solend users:
- “Yes”: manually intervene and take control of the whale’s account;
- ” Nope “: do nothing at all.
The user community voted positively to 97.5% for’developer involvement.
Finance not so decentralized?
These votes are supported by a quantity of tokens SLND only representing a weight of $769,000, very little in the face of the sums at stake in this case. This approval was immediately mocked by many commentators… Indeed, it undermines the ideal of decentralized finance. This is also the very first governance proposal for Solend.
It is a landmark decision, like the famous fork ofEthereum, when hacking TheDAO’s contract. The sums at stake were moreover of the same order; the direct intervention of the developers – to prevent the hacker from pocketing his larceny – had been overwhelmingly approved by the network.
Moreover, this case shows us the technical limits of the MA. If they have the advantage of allowing us to exchange peer-to-peer, they present flaws in terms of accessibility to cash and D’capital efficiency. During high-volume operations, the slippage (the difference between the trade’s execution price and its expected price) can be huge. The Solend team speaks of 46% for such a liquidation, against 0.3% going through market-makers OTC.
DeFi needs to find patterns of price formation more efficient, but also liquidation mechanisms solid, even in extreme market conditions. About the governance of these systems, if your funds were threatened by a slightly degenerate whale, would you have voted “no” by ideal of decentralization ?
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