Analysis Of Solend Taking Over User’s Wallets In Bear Market 2022
The article provides content and analysis of the event Solend took over the management of a large wallet that is about to be liquidated.
A long-term decline in the market does not only damage player morale. Recently, a project is in the position of “hanging hair” in the liquidation of users. That’s Solend. So what are the details?
Solend is a lending platform on Solana in the form of a Money Market, which means that it acts as an intermediary for both users to lend and borrow. In these platforms, liquidation is a common action, which occurs when someone’s borrowing position hits the liquidation price.
It sounds simple, but there are cases where liquidation is not enough, but this also causes many other problems. Specifically, the case of Solend’s liquidation is below.
How Did Solend Take Over Wallet Management?
Events & Actions of Solend
On June 19, Solend announced on Medium that the largest wallet on Solend is in danger because it is close to the point of liquidation (check the wallet here ). Some information about the wallet is as follows:
- Deposited: 5.7M SOL ($170M) – 95% SOL deposited.
- Borrowed: 108M USDC and USDT – 88% of USDC borrowed.
- Accounted for 25% TVL Solend.
- Liquidation price: SOL touches $22.3
If the SOL price reaches $22.3, the liquidation will be partial with 20% (~$21M). This number is not a problem with OTC, but Solend’s mechanism is to sell on DEX. The consequences of this will be discussed in the next section.
Since June 13, Solend tried to contact the wallet owner through personal and community networks but did not receive a reply. In addition, the project also communicates with market makers to find optimal solutions (OTC, hedging through other trading methods, etc.). But in general, the above does not reduce the risk.
They then made the following proposal (SLND1):
- Make special margin requirements for large wallets that account for more than 20% of the loan. In this case, a special liquidation threshold of 35% is required. This policy takes effect after the proposal is approved.
- Regarding the above wallet, Solend Labs temporarily took over for liquidation via OTC. This emergency power is revoked as the borrowing position begins to become more secure.
And the proposal is passed.
Although passed, based on many user comments about wallet hijacking, Solend has another proposal called SLND2:
- Disable SLND1 suggestion.
- Increase voting time by 1 day.
- Create another proposal with no permissions to hijack emergency wallets.
This proposal was also quickly approved.
On June 21, SLND3 was released:
- The loan ceiling limit is 50 million USD, and loans above this level are eligible for liquidation.
- But do not apply immediately, starting at 120 million USD and gradually decreasing every hour to 500,000 USD until reaching 50 million USD.
- Temporarily reduce the maximum liquidation close factor from 20% to 1%. This limits the amount that can be liquidated in a transaction.
- Temporarily reduced the liquidation penalty for SOL from 5% to 2%. This reduces liquidator spam while still giving them enough bonuses to break even on slippage.
Damage If Not Handled
Prior to the SLND1 proposal, Solend considered non-intervention. But the aftermath doesn’t just affect each of these wallets.
The figure below shows the liquidity when selling 700,000 SOL (~$26.2 million).
As shown above, the price impact is about 35.51%. This shows that on-chain liquidity is not enough to absorb 35.6% of liquidated assets. So what if all assets are liquidated? This will cause mass liquidation of positions on Solend.
According to Solend, if sold via OTC, the slippage is only 3%.
Liquidators will try to spam the network in order to win these “honey” liquidations. This could cause network congestion again. And when the network is congested, other potentially liquidated positions can’t deposit “armour pump”. Everything made the story even more confusing.
In addition, many people do not notice, Solend has a Treasury that resolves bad debt. Treasury currently has about $20 million. And this event is likely to create bad debt for Solend, which with the above amount is not enough to solve.
Is Solend’s Solution Really Reasonable?
Solend is a DeFi platform, which means it doesn’t interfere with users’ assets for any reason. But in the SLND1 proposal, Solend has the right to intervene in this wallet, selling off assets so that the loan position becomes safe. This goes against the philosophy of decentralization.
The community has mixed opinions on this. But based on the damage mentioned above, Solend is facing two situations: Bad and Worst.
- Bad: Accepting the reputation of temporarily taking over wallet management, but solving many consequences later.
- Worst: Left alone doing nothing. This creates a chain of losses, in which both the user, Solend, and the Solana network suffer.
Therefore, it is easy to understand when Solend chose to intervene in the loan position of this wallet.
In addition, Solend’s action then makes sense in that it listens to the user and generates SLND2 suggestions. This proposal is not only based on public opinion but also because the price of SOL has gradually recovered slightly, giving the project more time to find a more optimal solution.
Despite its non-decentralized reputation, Solend shows professionalism when it comes to taking time to find ways to solve problems so as not to affect users. Still, this is a lesson for projects that don’t manage risks well enough to fall into a dilemma.
If you have any questions, comments, suggestions, or ideas about the project, please email [email protected].
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your research before investing.