• How a Solend Whale With a $108M Loan Nearly Crashed the Solana Network

  • 95 percent of the SOL deposits in the lending pool of Solend, a decentralized lending protocol on the Solana network, narrowly escaped being liquidated.

    A huge account holder, or “whale,” who has an outsized presence on the loan protocol and is in control of the great majority of the SOL coins therein is at the center of the debate. The loan was secured by SOL, the native cryptocurrency of the Solana network, and was for $108 million worth of US Dollar Coin (USDC) and Tether (USDT). As SOL’s price plummeted to as low as $27 between Wednesday and Saturday of last week, the loan ran the risk of being liquidated.

    Solend would have had nearly no SOL if the price of SOL had kept falling and the $21 million in SOL used as collateral for the loan had been liquidated. The co-founder of the project argued that the haste to acquire so much SOL for a discount may have caused the $2.6 billion Solana network to crash.

    The whale borrower transferred $25 million in USDC debt to Mango Markets, another lending protocol based in Solana, the protocol reported early on Tuesday, relieving some of Solend’s burden and lowering the protocol’s risk.

    The entire amount locked in the Solend protocol peaked at $1.4 billion at the beginning of April, was slashed in half, to $725 million, during Terra’s demise in May, and has been rapidly declining over the past week.

    There were $247 million worth of assets locked in the protocol as of Tuesday afternoon, and there were also $171 million worth of unpaid loans.

    The market would have had difficulty absorbing the $21 million worth of SOL (or 20% of the collateral) that would have been immediately liquidated, which would have been terrible for Solend given the weakening prices at the time. With such low interest rates, the lending protocol would have been at risk of losing practically all of its SOL lending pool.

    Furthermore, according to the pseudonymous co-founder of Solend Rooter, the rush by liquidators to acquire the $21 million worth of SOL at fire sale rates would have pushed the Solana network to the test.

    “This could cause chaos, putting strain on the Solana network,” they wrote in the blog post. “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 lessen some of its risk but not totally erase it after persuading the borrower to transfer some of their loan to another protocol. The borrower still owes the protocol $84 million.

    The neighborhood has taken steps to lessen that risk or, at the very least, keep it from happening again.

    The smart contract (the computer code that controls the lending protocol) will be changed so that it will temporarily liquidate 1%, not 20%, of deposits for undercollateralized loans. The proposal was overwhelmingly approved earlier today by the Solend community.

    When it appeared that the 5.7 million SOL deposit securing a $108 million stablecoin loan (US Dollar Coin and Tether) might be liquidated if the price of SOL fell to $22.30 last week, the DeFi lending protocol—whose name is a portmanteau of the words “Solana” and “lend”—began contacting the borrower.

    Rooter, the co-founder, even put up a suggestion, code-named “SLND1,” to take over the account in order to liquidate the collateral in a planned manner that wouldn’t overload (and maybe crash) the Solana network. However, the community overturned that idea after voting in favor of it.

    The Solend team responded to concerns that 24 hours was insufficient for members to cast their votes by writing on the request to invalidate the vote, “We’ve been listening to your criticisms regarding SLND1 and the manner it was conducted.”

    Markets were in a panic after hearing that $3 billion hedge firm Three Arrows Capital was negotiating with creditors to stay solvent and that cryptocurrency lender Celsius had blocked withdrawals to prevent a bank run.

    Solend operates similarly to many other DeFi lenders, which are non-custodial programs that let users trade, borrow, and lend crypto assets without the use of intermediaries like banks. Users can borrow crypto assets worth up to 75% of their collateral on Solend by depositing collateral, which at the moment consists of 47 different currencies and tokens spread across 18 liquidity pools.

    In the current economy, using cryptocurrency to get loans on any blockchain has been particularly dangerous. To inform borrowers that the Ethereum they had deposited to borrow Lido Staked Ethereum (stETH) would be liquidated, Lido took to Twitter in May.

    When a sizable borrower, at the time thought to be Three Arrows Capital, attempted to prevent the liquidation of $300 million in debts from DeFi lenders Aave and Compound last week, a similar issue surfaced.

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