Public pressure forces Solend u-turn on seizing user funds

Public pressure forces Solend u-turn on seizing user funds

Public pressure forces Solend u-turn on seizing user funds

The users of the Solana-based borrowing and lending service Solend voted on Sunday for a forced takeover of a whale’s account before tabling a second proposal to reverse the measure.

The dilemma faced by Solend was that the whale’s outsized margin position was getting close to being liquidated. Liquidation would likely have lead to a cascade effect with downward pressure on the Solana spot price. As the proposal  - SLND1 - set out, it could potentially mean “Solend could end up with bad debt”.

The governance vote was a first for Solend’s decentralized autonomous organization (DAO). It means that Solend Labs were granted emergency powers to liquidate the whale’s assets via an over-the-counter (OTC) trade rather than through decentralized exchanges, in the event of the Solana price dropping too low.

Numerous network shutdowns have occurred on the Solana blockchain over the course of the past year. This has brought into question claims that the blockchain is truly decentralized. Solend Labs blamed on-chain liquidations as the reason for this downtime and that the solution going forward should be OTC auctions when it comes to liquidating large positions.

DeFi’s most existential threat

The move sparked a raft of criticism from the broader DeFi community on the basis that it made a mockery out of the whole point of decentralized finance -  disintermediated and open, unmanipulated markets.

Edan Yago, core contributor to Layer 2 Bitcoin lending platform Sovryn stated: “Of all the things that happened this cycle, Solana’s vote to confiscate a user’s funds is BY FAR the most egregious. It’s worse even than the ETH DAO confiscation. It’s the clearest demonstration yet that PoS is not a consensus mechanism.” In response, proponents of Solana were at pains to point out that these actions were being taken by Solend rather than Solana.

DeFi researcher and analyst Chris Blec claimed that the team behind the Solend protocol had the ability to take control of the user’s funds all on its own. His view is that the vote was simply ceremonial to provide the illusion that token-holders had some level of control. “Imagine being a protocol dev and not realizing what kind of legal jeopardy you just created for yourself”, Blec said.  The analyst has been scathing in his criticism of protocols such as Aave, Chainlink, Optimism and WBTC that rely on a level of multisig control that renders them centralized, describing it as “DeFi’s most existential threat”.

Reversing course

In response to criticism of the SLND1 proposal, a SLND2 proposal was generated, asking the Solend community to vote to invalidate the previous proposal. Furthermore, to increase governance voting time to one day and to work on a new proposal that does not involve emergency powers to take over an account.

The vote to reverse the initial proposal has passed. The decision was made much easier as the Solana spot price had risen ( $35.68 at the time of writing), moving away from the liquidation price of $22.30. But the debate caused by these events is likely to rumble on for months to come.

This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.

Get insider crypto knowledge and product updates from the world’s leading crypto wallet
Sign me up