Michaël van de Poppe - 20 June 2022
Solend facing backlash following controversial governance proposal
Solend, Solana’s biggest lending platform, has been a hot topic in the last few days following a questionable governance proposal with concerns being raised of an abuse of power by Solend. SLND1, the first ever governance proposal of the platform, describes the problem Solend is facing regarding a large whale position. We investigated the situation and lined it out for you.
The SOL Whale
The biggest borrowing position on Solend is causing issues because of liquidation risk. With 5.7M SOL ($170M) deposited and $108M worth of stablecoins borrowed against it, the position makes up 95% of all SOL deposits and 88% of all USDC borrowings. If the price of SOL were to drop to $22.30 the whale’s position becomes liquidatable for up to 20% of their borrowings. If this were to happen it would not be great for the protocol and the Solana blockchain, because it would cause abrupt selling pressure. Since liquidators generally market sell on DEXes it would be hard to absorb the selling pressure. In the worst case scenario the (partial) liquidation of the whale’s position could cause Solend to end up with bad debt and trigger a liquidation cascade within the Solana ecosystem.
Additionally it could cause the Solana network to go down because of liquidators spamming the ‘liquidate’ function on the whale’s position, which according to Solend has been known to be a factor causing the network to go down in the past.
SLND1 proposes to “Enact special margin requirements for large whales that represent over 20% of borrowings and grant emergency power to Solend Labs to temporarily take over the whale's account so the liquidation can be executed OTC.” The second part of the proposal is especially interesting. Taking over the whale’s account would be an extreme measure, but understandable taking the consequences of a potential liquidation into account. It is questionable if the decision is in line with the decentralized ethos of blockchain protocols, as it would confirm that it is within the Solend team’s power to confiscate deposited assets. It is notable that the proposal only had an extremely small window of 6 hours for users to vote for or against the proposal.
It came to our attention that the proposal was voted for by 97.5% of votes, with approximately 87% of total ‘Yay’ votes coming from a single wallet holding about 1% of the total circulating supply of the SLND token. This means that the fate of $175M worth of assets is being determined by just over $700k worth of SLND tokens. Rumors regarding the vote coming from the team or investors were quickly dismantled by the devs, claiming the large vote came from an anon user who bought all their SLND from secondary markets.
Following the SLND1 proposal, the price of SOL has been steadily increasing, buying the team time to gather more feedback and consider alternatives. The Solend team has recognized the flaws in their first proposal and put up SLND2. SLND2 proposes to invalide SLND1, increase the governance voting time from 6 hours to 1 day and work out a new proposal that does not involve emergency powers to take over an account. Additionally the team has stated they are committed to protecting user funds, transparency and doing what’s right. Again the SLND whale holding 1% of circulating supply has voted for the proposal and even left a comment this time around, stating his/hers concerns.
The outcome of this situation is hard to predict as it all depends on what the Solend team’s decision will be regarding the whale wallet. We could all agree on the fact that the Solend team faces a dilemma. If they end up taking over the whale’s wallet it may save the Solana ecosystem from an implosion, but will make it clear that anyone's assets may be confiscated in such conditions and could cause DeFi users to avoid using their protocol. In case the team is not able to mitigate the risks surrounding the whale’s wallet, it could trigger a meltdown of the Solana ecosystem and force a dump of SOL’s price.
We will continue to monitor the situation and release any relevant information as soon as it comes up.