{"id":928,"date":"2022-06-20T18:38:54","date_gmt":"2022-06-20T18:38:54","guid":{"rendered":"https:\/\/grandpascrypto.com\/?p=928"},"modified":"2022-06-20T18:38:57","modified_gmt":"2022-06-20T18:38:57","slug":"solend-loses-trust-as-it-almost-claims-control-of-a-whales-wallet","status":"publish","type":"post","link":"https:\/\/grandpascrypto.com\/solend-loses-trust-as-it-almost-claims-control-of-a-whales-wallet\/","title":{"rendered":"Solend Loses Trust As It (Almost) Claims Control Of A Whale\u2019s Wallet"},"content":{"rendered":"\n

tl;dr Summary:<\/em><\/strong> Over the weekend, Solend, a lending platform on Solana\u2019s blockchain, feared a massive liquidation event due to a whale\u2019s oversized holdings. In an attempt to stop this, a vote was initiated for Solend to take control of the whale wallet and manage it directly. This vote was ultimately overturned but it brought up issues of ownership, trustlessness, and governance systems.<\/em><\/p>\n\n\n\n

Lending platforms are high-risk financial institutions that allow lending and borrowing assets on a particular blockchain. Aave is an example <\/a>of a lending platform on the Ethereum blockchain. Solend is an example of a lending platform on the Solana blockchain. Solend describes themselves<\/a> as \u201can algorithmic, decentralized protocol for lending and borrowing on Solana.\u201d <\/p>\n\n\n\n

In order to manage the protocol, Solend also operates a decentralized autonomous organization (DAO), or at least the wallets thereof. In the whitepaper, the DAO\u2019s treasury is to be used as insurance<\/a> to reimburse users who are affected by some big change on the platform, such as oracle-based liquidations<\/a>. No governance votes had happened before June 19, 2022.<\/p>\n\n\n\n

Another type of liquidation that can occur is when a borrower\u2019s position needs to be adjusted to balance the lend to borrow ratio. This is an attempt to keep the liquidity pools on a protocol full enough that users can withdraw their assets. <\/p>\n\n\n\n

One Wallet to Rule Them All<\/strong><\/h2>\n\n\n\n

What happened over the weekend is that one wallet\u2014which happened to be the largest holder in Solend\u2014had a very large margin position. A margin position<\/a> is the amount of collateral an individual deposited with the protocol that is supposed to cover the risk of the amount that they are borrowing. Most DeFi protocols have an allowable ration that will be automatically rebalanced if it gets out of whack.\u00a0<\/p>\n\n\n\n

This particular whale had deposited about $170 million USD (5.7M SOL) and borrowed $108 million USD in stablecoins. The concern that Solend had was that if the value of SOL dropped low enough, the whale would have to liquidate (or sell) 20% of their borrowed assets, which was about $21M USD. <\/p>\n\n\n\n

That\u2019s a lot of money for a platform to have to balance all of a sudden. There\u2019s even a risk of the entire Solana network going down again<\/a>, as this volume of liquidation has caused before. <\/p>\n\n\n\n

After finding out about this risk, a lot of Solend users withdrew their stablecoin positions, causing the liquidity pool to be unable to pay out any more assets. This meant that if the whale needed to be liquidated, it wouldn\u2019t work. <\/p>\n\n\n\n

If a position can\u2019t be liquidated, the values of the original deposited asset and of the borrowed asset will be negatively affected. Essentially, the entire protocol could stop working, with no one being able to withdraw their assets.<\/p>\n\n\n\n

Solend tried to reach out to this whale to get them to reduce their position but were unsuccessful in making contact. Solend tried a few other things<\/a>, such as reaching out to market makers and other protocols to try to set up more liquidity to protect their users from this risk.<\/p>\n\n\n\n

However, none of this was enough.<\/p>\n\n\n\n

The First Proposal<\/strong><\/h2>\n\n\n\n

After almost two weeks of no activity from the whale, a proposal<\/a> named \u201cSLND1: Mitigate Risk From Whale\u201d was issued to the DAO that, if approved, would do two things<\/a>:<\/p>\n\n\n\n

  1. Enact stricter margin requirements.<\/li>
  2. Grant the ability to Solend Labs to \u201ctemporarily take over the whale\u2019s account\u201d so that they can manage the margin position themselves.<\/li><\/ol>\n\n\n\n

    To clarify, the second aspect of the proposal doesn\u2019t mean they are accessing the whale\u2019s wallet directly. Rather, they are just accessing the funds that the wallet deposited on the platform. One way to think about it is like putting money in a bank account: I’m the only one that knows my pin number for my card and has the wallet I store my card in, but the bank can still move my funds around as they see fit since the funds aren’t cash in my pocket (assets in my wallet).<\/p>\n\n\n\n

    The proposal passed.<\/p>\n\n\n\n

    \n

    Solend DAO passes proposal to take over the account of a large holder with a position that poses systemic risk

    June 19, 2022    https:\/\/t.co\/uNZanzz5qJ<\/a> pic.twitter.com\/5kkXo4HwCW<\/a><\/p>— web3 is going just great (@web3isgreat) June 19, 2022<\/a><\/blockquote>