After the series of liquidation risks in cryptocurrency funds and lending companies, now it was the turn of the Solend protocol. Operating on the Solana (SOL) network, this decentralized finance (DeFi) protocol can block and even confiscate the funds of a large investor.
According to the protocol, the whale in question has more than $100 million worth of SOL. However, the investor is on the verge of facing a major sell-off.
Apparently, this sale could cause a chaotic chain effect. That’s why Solend voters chose to block the funds. But investors generally criticized the proposal, which goes against the decentralization principles of a blockchain.
Over the weekend, Solend opened voting to decide the fate of the whale’s funds. For six hours, holders of the protocol’s governance tokens (SLND) had the option to vote on the proposal.
The option was simple: vote “yes” or “no” to block the funds. In the end, the network passed the proposal by a large majority. There were 1,155,431 votes in favor of blocking, while 30,101 votes were against the proposal.
However, the vote aroused a series of controversies. First, investors complained about the rush to carry out the vote, which was rushed and lasted less than a day.
Solend’s co-founder, who goes by the pseudonym Rooter, admitted this mistake, but stressed that the move was urgent.
“We recognize that the 1-day voting time is still short, but we need to act quickly to address the systemic risk and the fact that normal users cannot withdraw USDC. We ask our community to be active in governance in the coming days. Voting time will be revisited in a future proposal,” she said.
The second point was an alleged concentration of votes in the hands of a few investors. In fact, of the more than 1.1 million votes in favor of the blockade, one million would have come from a single person. In other words, the voting was not decentralized, because if the investor had not voted, the “no” would have won the dispute.
Adam Back, CEO of Blockstream, criticized the vote and called it a “hostile takeover” from the market.
At the center of the crisis is the investor, whose portfolio has not had its origin detected. The investor deposited his funds in Solend and generated a big distortion as 95% of the entire SOL pool in Solend was this whale’s money.
In addition, the investor also deposited the equivalent of 88% of the loans on the USDC network. With that, the whale became the biggest user of the protocol.
However, the bear market in the cryptocurrency market hit the SOL price, affecting the whale’s liquidity. If the price of SOL reaches US$22.30, the protocol would automatically liquidate up to 20% of the investor’s guarantee.
Although the price of SOL is above $35 at the time of writing, it has dropped to close to $26. As a result, Solend developers feared that multi-million dollar settlement would flood decentralized exchanges (DEX ) from Solana with a lot of sales pressure and even congested the network.
Out of fear, developers passed a vote to command the investor’s portfolio and execute its liquidation.
Execution will be conducted “more transparently via the over-the-counter (OTC) market,” according to the team. Therefore, if the downside scenario actually happens, the Solend team will be responsible for liquidating another investor’s funds.
As expected, the market reacted negatively to the result of the vote. To top it off, the price of SOL appreciated, which made the move seem hasty.
Attorney Gabriel Shapiro went further and called the measure “illegal”.
“My mind is exploding with this. Not only is this contrary in every way to the “DeFi” ethos, it is also illegal. At best, this is transgression/conversion, with the potential to get much worse,” she stated.
Other personalities also criticized the proposal as “ridiculous”. Faced with the negative repercussion, Solend prepared a new proposal to revoke the previous approval. With more than 1.4 million votes in favour, the proposal was revoked and the investor will not have his funds blocked.
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