20 Jun 2022
Solana decentralization on display?
The Solana-based Defi protocol Solend recently voted to temporarily overtake a large and highly levered account. Although the proposal was later invalidated, another proposal has been approved in an attempt to mitigate systemic protocol risk.
On Sunday, the organization behind the Solana-based algorithmic, “decentralized” protocol for borrowing and lending–the Solend DAO–passed its first governance proposal vote with 97.5% affirmative votes. Notably, one whale provided 1M out of the 1,155,431 total votes—singlehandedly elevating the vote above the necessary 1% participation threshold.The proposal outlined a plan to grant the Solend team emergency powers to manually liquidate a large and unresponsive account belonging to Solend’s largest user in an over-the-counter (OTC) trade.The user’s account constitutes 88% of all borrowed USDC and 95% of all deposited SOL in Solend’s main pool. In aggregate, the user has deposited 5.7M SOL to borrow 108M USDC and USDT—a levered position where 20% of the position, or 21M, will be liquidated if SOL falls to $22.3.SOL has traded as low as $26 in the recent market-wide meltdown—uncomfortably close to the liquidation price. However, the price bounced to $37 over the last few days, alleviating the immediate liquidation danger. A 40% sell-off is now required for the account to become liquidated.In a liquidation event, the account's assets would normally be liquidated on-chain through market sells on decentralized exchanges. As explained in the proposal, this process could now potentially pose systemic protocol risk. These decentralized exchanges lack sufficient liquidity to handle sell orders of this size.As a result, the proposal sought to mitigate the damages from the forced liquidation by initiating the token sale through an OTC desk instead of on-chain, thereby reducing the market impact.Furthermore, a forced liquidation event could trigger the Solana network to go down, which it has been known for in the past, as liquidators would spam the liquidations function. The proposal unsurprisingly triggered negative reactions across the crypto community, as seizing user assets strongly opposes DeFi norms. As a result, the temporary account seizure plan was reversed as users overwhelmingly voted in favor (99.8%) of the counterproposal "SLND2" on Monday 20th, invalidating the first proposal. Solend now attempts to outline a new plan that does not involve account seizure.Shortly after the proposal "SLND3" was approved. While the proposal sought to introduce a per-account borrow limit of $50M, this target will be reached by gradually decreasing the borrow limit from $120M. A reduction of $500k per hour is targeted. Any debt above the borrow limit will be eligible for liquidation, regardless of collateral value. Notably, there will be no restrictions on how many accounts one individual can have. Thus, users will have the ability to borrow more if they use multiple accounts. Additionally, the liquidation penalty for SOL would temporarily be reduced from 5% to 2%. Because the liquidation penalty serves as an incentive mechanism for liquidators, this reduction would reduce network spam.Notably, the whale has now moved $25M to a different protocol, namely Mango markets, in an attempt to reduce the systemic impact.Nevertheless, these events shows how the term “decentralization” might not always represent true decentralization, something DeFi participating should keep in mind.