There have been some worrying trends in crypto lately, but last week in particular caught my eye. Solana-based lending platform Soland passed a government vote to take over a private wallet.
The private wallet (hereinafter referred to as “Whale”) deposited 5.7 million SOL, currently valued at $200 million, on the lending platform. Against this situation, Whale borrowed $108 million worth of stablecoins. The 5.7 million SOL tokens comprise over 95% of the total deposits on the platform.
The problem arose when the price of the solana fell along with the broader market, significantly reducing the value of the whale’s collateral and bringing into play a potential liquidation scenario. In this event, the market would be flooded and potentially the value of the Solana token would decrease.
“In the worst-case scenario, Soland could end up with bad debt,” Soland said. “This could lead to chaos, putting pressure on the Solana network.”
consequences of liquidation
Plotting this amount of SOL against trading volume highlights how much of an impact this will have on the market, with the triggering effect of bots on the DEX potentially increasing downward pressure, causing it to flood the wallet market. Go.
The debt has a liquidation value of $22.27, which would require a 35% drop from current prices to close. While this is a huge drop, Solana is down 80% this year alone and a 35% drop from here is far from unimaginable – and it came very close as Solana fell to $25 last week.
Protocol attempted to reach out to the whales and appeal to them to top up the loan, but there was radio silence with the wallet lying dormant for almost two weeks. Therefore, a vote was passed and the Protocol voted to temporarily take the whale wallet and reduce the risks of the Protocol.
After taking over the wallet, the plan was to eliminate whales through over-the-counter transactions, rather than risk cascading transitions by liquidating them on-chain through automated mechanisms.
2/A heavy position of a whale $170M SOL deposited and $108M stables borrowed. They currently hold 95% of SOL deposits and 86% of USDC lendinghttps://t.co/Xp7Xym5LQt
— Router | soland (recruited!) (@0xrooter) 18 June 2022
Since then, Whale has transferred $25 million to the common markets, limiting the destruction on Soland should the liquidation be triggered.
3oSE…uRbE has acted upon our suggestion to spread our position across lending locations (decentralized and centralized) as a first step.
So far they have transferred $25M USDC loan @mangomarkets
This shows commitment to work and solves Soland’s USDC usage problem.
— soland (we’re hiring!) (@solendprotocol) 21 June 2022
However, while this mitigates the vulnerability of the Soland protocol, the risk of liquidation still remains, which means that Solana is on the very edge.
But let’s stop thinking about this for a second.
I understand that the end of the protocol didn’t happen on the wallet because the wallet was freely withdrawn, but the vote passed and that was the plan. It should also be noted that after an intense backlash on Twitter, another vote passed on Solande to reverse the earlier vote.
But it is the exact opposite of cryptocurrency: decentralized, censorship-resistant and trustworthy.
And with the precedent set, where is the line drawn? Whose accounts can potentially be taken? Can large account groups collectively take over smaller accounts and embezzle their funds? Can protocol owners claim assets from the wallet if they believe they are acting in a manner inconsistent with their vision?
The reality is that everything is possible because it is centralized, and a dangerous precedent has been set. Ironically, this is essentially the biggest reason for the invention of cryptocurrency – countering the dangers of centralization. If bitcoin founder Satoshi Nakamoto is out there somewhere, he should back away in horror.
New Vote Idea – Instead of liquidating Soland Whale, everyone who votes yes to this proposal gets to keep the whale’s money instead. Soland will have a lot of debt but the token holders who voted yes will be rich. LFG!
— cobie (@cobie) June 19, 2022
It is not clear who the whales are, but they are horribly disenfranchised by protocol. They deposited that money under the guise that they could take loans and do whatever they wanted. Now, owners and protocols have stepped in to forfeit that privilege in order to protect the price of their tokens. Money talks, huh?
As it turns out, the protocol is not a peer-to-peer, trusted protocol. Instead, it is a centralized lending platform that requires investors to trust owners and other users. The goalposts have not been moved, rather they have been completely destroyed.
This is not decentralized finance. Instead, it’s still-too-centralized-finance.