Solana’s Solend DeFi Platform Votes to Curb Liquidation Risks

Members of the Solend ecosystem are now voting on a governance proposal dubbed SLND2, which aims to achieve three major objectives, including curbing the risk of automatic on-chain liquidation of collateralized assets during margin calls, according to a blog post on June 20, 2022.

SLND2 Voting Process Ongoing 

Solend, an algorithmic decentralized finance (DeFi) protocol for lending and borrowing on the Solana network, is conducting a vote on a governance proposal that could potentially go against the ‘decentralization’ mantra of blockchain technology if passed.

Per a blog post by the Solend team, the SLND2 proposal aims to make the current automatic on-chain-liquidation process on the platform obsolete by introducing an “emergency power” feature that would liquidate assets via over-the-counter (OTC) platforms rather than on decentralized exchanges (DEXs).

This season’s crypto winter is indeed proving to be a one-of-a-kind bear market, as both large whales, miners, retail investors, and other market participants are feeling its impact in one way or the other.

It will be recalled that on June 19, 2022, the Solend team released the details of a large margin position which it says is putting the protocol and its users at risk due to the current market conditions. 

According to the team, the anonymous user who owns the wallet in question, deposited 5.7 million SOL valued at $170 million at the time (95 percent of solana deposits on Solend’s main pool), representing 25 percent of Solend’s TVL and:

• Borrowed 108 million worth of USDC and USDT  (88 percent of USDC borrows on the Solend main pool) at a liquidation price of $22.30.
• The last on-chain activity from the whale was 12 days ago

Avoiding Another Solana Crisis 

With the current decentralized nature of the Solend DEX, the team has made it clear that a solana price dump to the whale’s $22.30 liquidation price could be catastrophic for the entire Solana ecosystem since 20 percent (about $21 million worth of SOL ) of the whale’s borrows will be repaid automatically via on-chain transactions on DEXes.

“Letting a liquidation of this size to happen on-chain is extremely risky. DEX liquidity isn’t deep enough o handle a sale of this size and could cause cascading effects. Additionally, liquidators will be incentivized to spam the network in an effort to win very lucrative liquidations. This has been known to cause load issues for Solana in the past which would exacerbate the problems at hand,” the team wrote.

As it stands, if a majority of members of the Solend community vote Yes to the SLND2 proposal, the development team will be authorized to:

“Enact special margin requirements for large whales that represent over 20 percent of borrows and grant emergency power to Solend Labs to temporarily take over the whale’s account so the liquidation can be executed OTC.”

Despite the good intentions of the Solend team, the SLND2 governance proposal has attracted criticism from some quarters still. Sharat Chandra, VP of Research and Strategy at EarthID said:

“Solend Labs has set a dangerous precedent of using ‘emergency powers’ to liquidate whale accounts,” adding that this method is not the best way to ensure stability.”

At press time, the price of solana (SOL) is hovering around $34.47, according to CoinMarketCap.