A Solana whale was on the verge of draining a liquidity pool, which would have created enormous repercussions.
Solend, a decentralized lending protocol based on the Solana network, narrowly escaped liquidating 95% of its lending pool’s SOL deposits.
A huge account holder, known as a whale, is at the core of the problem, with an enormous presence on the lending protocol and control over the vast majority of the SOL coins within it.
The account held a loan of $108 million in US Dollar Coin (USDC) and Tether (USDT) that was collateralized in SOL, the Solana network’s native cryptocurrency. As the price of SOL plummeted to as low as $27 on Wednesday and Saturday last week, the loan was at risk of being liquidated.
Solend would have been left with nearly no SOL if the price of SOL had continued to fall and the $21 million in SOL collateralizing the loan had gone into liquidation. The hurry to buy up so much SOL for so little money, according to the project’s co-founder, may have caused the $2.6 billion Solana network to crumble.
The protocol reported early Tuesday that the whale borrower has transferred $25 million in USDC debt to Mango Markets, another Solana-based lending protocol, relieving Solend of some of the weight and lowering the protocol’s risk.
The total value locked in the Solend protocol peaked at $1.4 billion in early April, dropped to $725 million after Terra’s collapse in May, and has been dropping rapidly in recent weeks.
There were $247 million in assets locked in the protocol as of Tuesday afternoon, with another $171 million in outstanding debts.
That liquidation would have been catastrophic for Solend because, with prices behind, the market would have failed to absorb the $21 million worth of SOL that would have been immediately liquidated (or 20% of the collateral). The lending protocol would have been at danger of losing nearly all of its SOL lending pool at extremely low rates.
Solend’s pseudonymous co-founder Rooter said that the hurry by liquidators to buy up the $21 million worth of SOL at fire sale rates would have pushed the Solana network through its paces.
“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 was able to decrease part of its exposure by persuading the borrower to relocate some of their debt to a different protocol, but not totally. The protocol still owes the borrower $84 million.
The community has taken steps to minimise or, at the very least, prevent it from occurring again.
The Solend community decisively approved a proposal earlier today that would set a $50 million borrowing limit per account and change the smart contract (the computer code that oversees the lending protocol) to temporarily liquidate 1% of deposits for undercollateralized loans, rather than 20%.
When it appeared that the 5.7 million SOL deposit collateralizing a $108 million stablecoin loan (US Dollar Coin and Tether) could be liquidated if the price of SOL dropped to $22.30, the DeFi lending protocol, whose name is a portmanteau of the words “Solana” and “lend,” began attempting to contact the borrower last week.
Rooter, the co-founder, even proposed taking control of the account, dubbed “SLND1,” so that the collateral could be liquidated in an orderly way that didn’t jam (and possibly crash) the Solana network. The community, however, overturned the idea after voting in favor of it.
After receiving criticism that 24 hours was not enough time for members to vote, the Solend team wrote on the proposal to nullify the vote:
“We’ve been listening to your criticisms about SLND1 and the way in which it was conducted,”
Markets were already reeling from news that crypto lender Celsius had halted withdrawals to prevent a bank run and that $3 billion hedge fund Three Arrows Capital was in talks with creditors to stay afloat.
Solend functions similarly to many other DeFi lenders, which are non-custodial apps that allow users to trade, borrow, and loan crypto assets without the use of third-party middlemen like banks. Users deposit collateral—currently 47 different currencies and tokens spread across 18 liquidity pools—and borrow crypto assets worth up to 75% of their collateral on Solend.
In this volatile market, using crypto to secure loans on any blockchain has been extremely hazardous. Lido warned borrowers on Twitter in May that the Ethereum they had placed to borrow Lido Staked Ethereum (stETH) could be liquidated.
A similar issue arose last week when a significant borrower, thought to be Three Arrows Capital at the time, attempted to avoid the liquidation of $300 million in loans from DeFi lenders Aave and Compound.
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