Solend abolishes the proposal of "taking over the giant whale" and liquidates the "bomb"

The encrypted asset market has been going down day after day, and liquidity risks have begun to transfer to DeFi applications on the blockchain. On the Solana chain, Solend, the largest lending platform, has been concerned about bad debts in recent days.

On June 19, Solend suddenly launched a governance proposal called "SLND1: Reduce the Risk of Giant Whales" in the community, planning to increase the liquidation threshold for users with large mortgage positions and take over a giant whale account with liquidation risks. The first proposal initiated by the platform since its inception ended in only 5.5 hours of hasty voting, drawing criticism from users, especially the takeover of the whale account.

Amid the criticism, Solend urgently released a new proposal on June 20, abolishing "SLND1", extending the voting time, and promising that future proposals will not involve authorization to take over accounts. The proposal was subsequently voted on.

Although the governance strategy has been updated in time, under the general downward trend of the encryption market, the liquidation risk of giant whales on Solend has not been eliminated, and it has also suffered a loss of funds due to a crisis of trust. In the past few days, the total value locked (TVL) of the platform’s encrypted assets has dropped from above US$300 million to US$265 million, and the utilization rate of USDT and USDC lending pools reached 100% at one point, making it difficult for depositors to withdraw cash.

As the encrypted asset market is going bearish, market liquidity is also tightening, and the anti-risk ability of the DeFi platform is facing a test. On the one hand, due to insufficient liquidity on the chain, large liquidations can easily lead to chain liquidation, and the prices of various assets will be hit; The situation of insolvency will eventually lead to bad debts on the platform.

How does the DeFi platform deal with the liquidity crisis? This difficulty came to the fore after the crypto market went bearish.

Solend's proposal to "take over whale accounts" was overturned

The "giant whale" that threatens Solend is an address that has mortgaged a huge amount of SOL assets on the platform.

Solend revealed that a giant whale address account starting with "3oSE9C" has a huge position on the platform. The account previously mortgaged 5.7 million SOL (approximately 170 million US dollars at the time) and lent USDC with a total value of 108 million US dollars and USDT. The assets held in this account accounted for 25% of the total locked value (TVL) of the Solend platform, 95% of the main deposit pool of SOL, and the USDC lent accounted for 88% of the main USDC pool.

According to Solend's regular liquidation rate of 20%, once SOL falls to $22.3, the giant whale account will face liquidation. At that time, the 5.7 million SOL mortgaged by the account will be sold to the market. If the price of SOL drops sharply, there is a possibility that the SOL mortgaged by the giant whale account will not be enough to repay the loan, resulting in bad debts.

"Solend has US$20 million in treasury funds that can be used to help repay bad debts, but in the worst case, the funds may still be insufficient." Solend said that the platform is currently actively trying to get the giant whale to repay the position, but has been unable to Get in touch with it, and as of June 19, the giant whale address has not had any on-chain activities for 12 days.

As a result, a proposal with a voting time of only 5.5 hours appeared, which proposed two special restrictions for whale users.

First of all, special margin requirements are imposed on giant whales that account for more than 20% of the total loan amount. If the user's loan amount exceeds 20% of all loans in the main pool, the liquidation rate threshold needs to be raised from the normal 20% to 35%.

The increase of the liquidation rate to 35% means that the trigger liquidation price of the giant whale account will be raised. According to this calculation, once the SOL reaches above $25, the account’s 5.7 million SOL position will be liquidated. As of press time (19:46 Beijing time), the market price of SOL was around $36.5. On June 18, when the overall encryption market went down, that is, the day before Solend issued this proposal, the market price of SOL reached as low as $27.15. Instead, on June 14, SOL fell to a new low of $25.86 for the year.

The second requirement in the "SLND1" proposal is that the community grants the platform's official team, Solend Labs, the emergency power to take over the accounts of giant whales, so that liquidation can be performed in over-the-counter transactions and avoid pushing SOL (the price) to the limit. This will be done through Smart contract upgrade to complete. Emergency powers will be withdrawn once the whale’s account reaches a safe level.

Since the voting time for the "SLND1" proposal was only 5.5 hours, many platform users did not know what happened, and the voting had already ended. In the end, the proposal was passed with 1.155 million (97.5%) votes in favor and 30,000 (2.5%) against.

Out of concerns about the risk of bad debts, Solend initiated this special proposal, but users did not agree with the result, and overwhelming doubts came, especially for the official team's request to take over the giant whale account.

On social networks, some KOLs commented on the "SLND1" proposal as "outrageous". He said that one of the top ten public chains by market capitalization has the largest lending agreement invested by many institutions and has been in operation for one year. No proposal has been initiated to discuss a complete risk control framework. The first proposal was to discuss how to deprive a user of legal property ownership, and the community was given less than 6 hours to vote and quickly announced its approval.

There are also users’ concerns that Solend can manipulate the voting results through the governance token it controls. If the giant whale account can be controlled in this way, then it is not impossible to control all accounts through voting and complete the plundering of user assets.

The controversy was huge, and Solend immediately launched the "SLND2" proposal on June 20. The contents were to revoke the SLND1 proposal; increase the governance voting time to 1 day; formulate a new proposal that does not involve account takeover.

The "SLND2" proposal initiated by the Solend team

In the end, the "SLND2" proposal was passed with a support rate of 99.8%, which means that the liquidation threshold for giant whale accounts is still 20%, and the project team temporarily gave up taking over the giant whale accounts.

Liquidity crisis challenges DeFi platform risk control

Solend's "SLND1" proposal was overturned after public criticism. This seems to be a victory for DeFi users to use voting governance restrictions to do evil, but the risk still hangs there.

Although the price of SOL rebounded to around $36, the sirens for liquidating the positions of giant whales weakened, but the downward trend of the encryption market is still there, and the time bomb has not been lifted. Users actually bought some time for the giant whales to deal with the liquidation by voting, and their eyes began Focus on the giant whale address.

The giant whale that "couldn't be contacted" has not changed yet, and another speculation has begun to appear: Will the giant whale account on Solend have no intention of repaying the loan from the beginning of the loan? Some voices believe that if 5.7 million SOLs are shipped in the secondary market, it may cause a series of stampedes, and eventually the actual value of the giant whale is less than 108 million US dollars. Therefore, he might as well choose a loan agreement to covertly withdraw stable currency assets.

However, there are also views that refute that this possibility is unlikely, "According to SOL's 75% mortgage asset value ratio on Solend, the user could have lent assets worth 127.5 million US dollars, but he only borrowed 108 million US dollars; he It is also possible to offset part of the slippage by shorting while selling in the secondary market, there is no need to exchange SOL worth 170 million US dollars for 108 million US dollars.”

Those who refute still retain the greatest goodwill towards giant whales, but in fact, the operation of using a huge amount of SOL with large price fluctuations as collateral to withdraw stable currency assets is indeed achievable, and does not violate the rules of the lending platform, but it is a risk It is completely left to the platform and its users. The procedure was fine, but the result was horrible.

Some funds are being pulled from Solend after the storm over its proposal.

Solend's TVL continues to decline

It can be seen from the data on the chain that in the past few days, Solend’s TVL has dropped from above $300 million to $274 million. Among them, the USDC and USDT lending pools experienced a significant loss of funds. Due to the withdrawal of funds by many users, the utilization rate of these two pools once soared to 100%. This shows that these two types of deposits on the platform may be exhausted. If the borrower delays repayment, the depositor may not be able to get back the principal, not to mention the loss of interest.

As of 4:00 p.m. on June 20, the total deposits and total borrowings in the Solend USDC lending pool were both $120 million, and the utilization rate of the pool was close to 100%, although the pool’s USDC deposit interest rate has risen to 64.85%. However, no significant capital inflow has been seen.

The risk control capabilities of DeFi protocols are facing the test, especially for lending and wealth management platforms with certain leverage characteristics. As the possibility of mortgage assets plummeting increases, such platforms are all facing the potential risk of bad debts.

Some people in the industry believe that the DeFi protocol should combine different market conditions and formulate corresponding risk control strategies. For example, during periods of violent market fluctuations, the mortgage rate of assets can be reduced, and the liquidation threshold can be appropriately increased to prevent systemic risks.

"In the final analysis, during the bear market, the liquidity of the entire encrypted asset market is tightened accordingly, and the liquidity of assets on the chain is greatly reduced, which often leads to the inability of users to withdraw their deposits, and large liquidation causes the market to plummet, etc." said above. According to sources, during the bull market period, market funds are active, and all mainstream DeFi protocols have sufficient capital reserves and relatively sufficient liquidity. Once the market goes bearish, many institutions and users will choose to withdraw assets, and the liquidity of the DeFi protocol will become very poor. At this time, if liquidation occurs on the chain, a small amount of funds can cause a huge drop, which can easily lead to a series of liquidation.

DeFi broke out in 2020 when the encrypted asset market was booming, but two years later, the market entered a period of decline. Recently, the centralized lending platform Celsius fell into a liquidity crisis and suspended withdrawals, the encrypted hedge fund Three Arrows Capital was on the verge of bankruptcy due to large debts, and the encrypted asset exchange AEX suffered a run. These crises are not unrelated to DeFi. The risks of the centralized market are being transmitted to each other, and the probability of systemic risks increases.

When Solend is facing the risk of bad debts due to the liquidity crisis, other DeFi protocols are also facing a big test in the market with tightened liquidity. Various on-chain liquidations are like ticking time bombs, which may bring a heavy blow to the encryption market at any time. However, the design of the risk control mechanism is still a challenge that DeFi cannot bypass.