Key takeaways:
- Solend whale’s account has a $108M outstanding loan in USDC and USDT.
- The total value locked in the Solend protocol was $725M during Terra’s crash.
- The liquidation could lead to chaos, putting pressure on the Solana network.
- Three Arrows Capital strove to prevent the liquidation of $300M worth of debts.
Solend, a decentralised lending protocol on the Solana network, nearly averted the liquidation of 95% of the SOL deposits in its lending pool.
$108 Million Loan From Solend Whale
At the crux of the debate is a “whale,” who is accountable for most SOL coins within the lending system. The account has an outstanding loan of $108 million worth of US Dollar Coin (USDC) and Tether (USDT), secured by SOL. Last week, the price of SOL dropped to as low as $27, putting the loan at risk of being liquidated.
If SOL price kept declining and the $21 million in SOL collateralising the loan had been liquidated, Solend would have been left with virtually no SOL. The project’s co-founder speculated that the hurry to purchase so much SOL on the cheap might have brought down the $2.6 billion Solana network.
The protocol revealed early on Tuesday that the whale borrower transferred USDC debt worth $25 million to Mango Markets, another Solana-based lending protocol, easing Solend’s load and minimising the protocol’s risk.
3oSE…uRbE has acted on our suggestion to spread their position across lending venues (decentralized and centralized) as a first step.
So far they’ve moved $25M USDC debt to @mangomarkets
This shows commitment to working things out and solves Solend’s USDC utilization problem.
— Solend (we’re hiring!) (@solendprotocol) June 21, 2022
The total value locked in the Solend protocol peaked at $1.4 billion in early April, was halved to $725 million throughout Terra’s cataclysmic crash, and has been falling rapidly over the last week.
As of Tuesday afternoon, the protocol had secured $247 million worth of assets and $171 million in outstanding loans.
This liquidation would have been terrible for Solend, as the market would have failed to absorb the $21 million worth of SOL (or 20% of the collateral) that would have been immediately liquidated due to falling prices. The lending procedure would have been at risk of losing nearly its entire SOL lending pool if interest rates were significantly reduced.
And the dash by liquidators to purchase $21 million worth of SOL at fire-sale rates would have put the Solana network to the test, stated the pseudo-co-founder of Solend, Rooter.
In a blog post, they warned, “This could cause chaos, putting strain on the Solana network.” “Liquidators would be especially active and spamming the liquidate function, which has been known to be a factor causing Solana to go down in the past.”
Solend could lessen part of its risk after persuading the borrower to transfer a portion of their loan to a different protocol, but not all of it. The borrower still owes the protocol $84 million.
Solend Lending Protocol’s Response
The community has taken measures to lessen this risk or, at the very least, to prevent it from recurring. The Solend community voted overwhelmingly in favour of a proposal restricting borrowing to $50 million per account and modifying the smart contract to temporarily liquidate 1%, rather than 20%, of deposits on collateralised loans.
The DeFi lending protocol began contacting the borrower last week when the 5.7 million SOL deposit used as collateral for a $108 million stablecoin loan (US Dollar Coin and Tether) could be liquidated if the price of SOL fell to $22.30.
Rooter, the co-founder, even proposed the plan “SLND1” to seize control of the account so that the collateral could be liquidated in a way that would not jam (and perhaps down) the Solana network. However, following a vote in favour of that proposal, the community overturned it.
After receiving comments that 24 hours was insufficient for members to cast their ballots, the Solend team stated on the request to invalidate the vote, “We’ve been listening to your criticisms about SLND1 and the way in which it was conducted.”
That cryptocurrency lender Celsius had blocked withdrawals to avert a bank run, and $3 billion hedge fund Three Arrows Capital was negotiating with creditors to remain viable, sending the markets plummeting.
Solend operates similarly to many other DeFi lenders, a name for non-custodial programs that allow users to trade, borrow, and lend crypto assets without the need for intermediaries like banks. On Solend, users deposit collateral (currently 47 distinct currencies and tokens distributed over 18 liquidity pools) and can borrow crypto assets worth up to 75% of their collateral.
Using cryptocurrency to secure loans on any blockchain has been particularly dangerous given the volatile market conditions. In May, Lido warned borrowers through Twitter that the Ethereum they had placed to borrow Lido Staked Ethereum (stETH) might be liquidated.
Last week, a significant borrower, thought at the time to be Three Arrows Capital, attempted to prevent the liquidation of $300 million worth of debts from DeFi lenders Aave and Compound.