Analysis of Defi’s potential risks behind the Solend governance fiasco

The market panic caused by the AEX exchange withdrawal crisis has not yet dissipated, and Solana eco-lending agreement Solend has emerged as a liquidation risk.

Rooter, founder of Solana eco-lending protocol Solend, tweeted that a certain giant whale (address starting with 3oSE) has $170 million worth of SOL deposits and $108 million worth of USDC+USDT debt positions on Solend, with a liquidation price of about $22.27. Its SOL deposits account for nearly 95% of Solend Main Pool and 86% of USDC debt. Given the potential ripple effect of liquidating the amount of its positions of huge relative agreement size, Rooter cries out for the giant whale to repay its positions as soon as possible.

Immediately after, Solana eco-lending protocol Solend launched a governance vote “SLND1: The platform intends to extract liquidation rights from individual whale wallets, which requires the ability to disrupt the market. Under the governance vote, nearly $20 million of SOLs would be liquidated in OTC transactions. While this plan gives Solend the ability to temporarily control whale wallets, it has caused community outcry.

Solana Eco-Lending Protocol Solend’s SLND2 proposal vote, released on the 20th, passed with 99.8% support, which included: invalidating proposal SLND1; increasing the governance vote to one day; and creating a new proposal that does not involve the power to take over accounts in an emergency.

Negatively affected by the liquidation event, SOL price also fluctuated drastically on June 20, falling as low as $27.36, almost close to the liquidation price of $22.27. Fortunately, there was not the most disappointing situation for the market, and recently, SOL followed the general market out of the rebound trend, and at the time of writing, SOL price was $38.36.

On June 21, the Solana eco-lending agreement Solend proposal SLND3 was passed with 99.7% support. The proposal addresses the liquidation of the giant whales by proposing to introduce a $50 million borrowing limit per account, temporarily reduce the maximum liquidation closeout factor from 20% to 1%, and lower the liquidation penalty to 2%.

In addition Solend is engaging with market makers to help provide better on-chain liquidity, and if approved, the proposal will become effective as soon as possible.

ZT Labs: Proposal SLND3 is actually protecting giant whale users

If the Sol falls below the liquidation trigger price, it will trigger the on-chain liquidation to sell the Sol of this giant whale user at the market price, which will cause a vicious circle leading to the sale of the 170 million Sol of the giant whale user at a very low price. At the same time, it will make the Sol coin price retreat significantly, which will lead to a large number of other on-chain loans also triggering liquidation. In addition, Solend has a 5% penalty for on-chain liquidation, worth nearly $10 million, and the new proposal SLND3 is a desperate move from Solend’s perspective.

Many professionals in the industry have expressed their views on the incident, with Chainlink community ambassador @ChainLinkGod questioning the project’s mechanics: Solend’s mechanism is designed to allow users to create lending positions that exceed the system’s capacity. However, the on-chain liquidity is simply not enough to liquidate the proposed debit positions. Therefore, the proposal proposes that the project team take over the position and liquidate it via OTC. This behavior sets a very bad precedent for DeFi and DAO governance and is a poor attempt at community governance.

Why is the governance vote delayed?

solend team contacted the whale users have been a period of events, but did not get a reply, if the giant whale is allowed to liquidate, the harm may be the entire Solana network and all users of the solana ecosystem, including in solend, solend do such a decision is also a helpless move.

The conflict at hand is whether Solend has the right to take over investors’ accounts, not the question of whether to liquidate them. Solend from the release of the proposal SLND1, then SLND2 appeared to repeal SLND1, and then SLND3 released on the 21st, a series of proposals from the side reflects that Solend itself is struggling, is to comply with the spirit of decentralization contract to do justice or to protect themselves, can not be judged by right or wrong.

Analysis of Defi’s potential risks behind the governance voting farce

Lending protocol Solend is an important part of Solana ecological Defi segment, Defi belongs to decentralized finance, DeFi finance has achieved exponential user growth in the past two years under the support of narrative, leverage, portfolio, and model replication, ZT Investment Research Institute believes that Solend’s withdrawal of clearing rights from a single whale wallet is a side reaction to Defi’s The infrastructure, security mechanism, governance model and other aspects still have certain loopholes, opening the precedent of taking over user assets in the history of Defi development, this behavior is fatal to the contractual spirit of the late Defi protocol decentralization, Solana ecological lending agreement Solend is shattering people’s trust in decentralization.

Solend has no risk response to the giant whale account and its governance model is imperfect (e.g., no explicit restriction on not involving user asset sovereignty) …… In a bear market deleveraging environment, no one can be sure that the next Solend will not emerge in the future. Of course, it also indirectly shows that Solana’s underlying performance is insufficient to support large-scale on-chain clearing.

Let’s look at the Solend incident again from the DAO governance perspective, starting with the value of DAO governance voting, the fundamental point still lies in the game of power and interest. Don’t expect perfection, it’s good to evolve to better. DAO advantage is that on-chain transparency and public proposal/voting (display) can somewhat inhibit the degree of shamelessness of the political game, or more quickly expose the evil factor in it, to reduce the cycle of evil

Solend used a few hundred thousand dollars of governance tokens to decide the disposition of only $200 million in assets. With the support of a16z votes, 1 million UNIs were donated to the DeFi Education Fund, dumped for a profit of Shun 10 million daggers, and the organization was later questioned as actually a lobbying fund promoted by a16z for its own benefit.

The problem with Solend is that it breaks the rules, or rather, it tears off the emperor’s new clothes of “DAO governance”. Ideally, DAO governance can play a corrective role in the development of the project, but in reality, DAO governance has become a symbolic procedure for “legitimizing decisions”, and the apparent centralized dictatorship is unpleasant, but the dictatorship disguised as democracy is even harder to accept!

Write at the end

This is not a local issue regarding Solend, but a common test for the entire DeFi industry to continue to grow, and Defi has a long way to go to truly avoid systemic financial risk.

ZT Labs warmly reminds that the market has been volatile recently, so please be aware of liquidity risk when participating in DeFi projects.