Solana DeFi Platform Tried to Take Over a Whale Account: What is DeFi?

Solend, a decentralized lending platform, tried to take control of a whale account, sparking a major backlash. We investigate Solend and DeFi.

What is DeFi?

Decentralized finance, or DeFi, allows users to complete transactions with each other via blockchain networks rather than through centralized institutions like banks. This cuts out the middleman in an effort to make financial transactions quicker, cheaper, and more efficient. 

What is Solend?

Solend is a DeFi app that allows users to borrow and lend funds using the Solana blockchain. Last week, the company claimed that a  “whale” — an individual or company with enough money or power to influence the price of a cryptocurrency — was sitting on an “extremely large margin position” that potentially put the protocol and its users at risk. 

The account concerned had deposited 5.7 million Sol tokens in Solend, accounting for 95% of all deposits and representing 88% of all USDC borrowing. If Sol’s price fell below $20.30, 20% of the account’s collateral would be at risk of liquidation. 

On Sunday, Solend passed a proposal granting it emergency powers to take control of the whale’s account to stabilize the system and prevent a spill-over crisis. The company claimed the actions would allow it to liquidate the whale’s portfolio via ‘over-the-counter’ transactions rather than exchange trades. 

What was the reaction to Solend’s emergency powers?

The move led to a severe backlash as users believed that Solend was abandoning the core tenet of DeFi – decentralization. On Monday, users were asked to vote on a new proposal to overturn the emergency powers, where 99.8% of the community voted “yes”.

Had the collateralized loan gone into liquidation, Solend would have been left with almost no Sol. This, in turn, would have led to a rush in buying up the coin for cheap and crashing the $2.6 billion network. 

On Tuesday, Solend convinced the borrower to move some of the debt to another Solana-based protocol, thereby reducing the company’s exposure. However, the risk has not dissipated entirely as the borrower still owes the protocol $84 million. 

Another vote on Tuesday by the Solend community approved a new proposal. This would impose a $50 million borrowing limit per account and adjust the smart contract so it will temporarily liquidate 1% instead of 20% of deposits on undercollateralized loans.  

The beginning of this spectacle showed DeFi in crisis and evidence that centralization is needed when it comes to financial transactions. However, as time went on, Solend and its community were able to work together to reduce excessive exposure and stabilize the system. 

While the outcome wasn’t perfect, it reveals the potential for decentralization in the financial system. At the time of writing Sol was trading at $39.28, well above its margin call.