How a Solend whale with a $108 million loan nearly crushed the Solana network

Solend, a decentralized loan protocol on the Solana network, narrowly avoided liquidating 95% of SOL deposits in its loan pool.

At the center of the controversy is a large account holder, known as the Whale, with an outsized presence on the loan protocol and responsible for the vast majority of SOL coins within it. The account had an outstanding loan of $108 million in US dollar coins (USDC) and Attached (USDT), collateralized in SOL, the native cryptocurrency of the Solana network. The loan was in danger of being liquidated as the price of SOL fell to $27 on Wednesday and Saturday last week.

If the price of SOL had continued to fall and the $21 million of SOL securing the loan had gone into liquidation, Solend would have been left with almost no SOL. The project co-founder suggested that the rush to buy so many low-cost SOLs could have crashed the $2.6 billion Solana network.

Early Tuesday, Protocol announced that the whale’s borrower had moved $25 million of USDC debt to Mango Markets, another Solana-based lending protocol, thereby relieving Solend of some of the burden and reducing the risk of the protocol.

The total value locked in the Solend protocol hit $1.4 billion in early April, halved to $725 million when Terra collapsed in May, and saw a rapid decline over the last week.

As of Tuesday afternoon, there were $247 million in assets tied up in the protocol and another $171 million in outstanding loans.

This liquidation would have been disastrous for Solend because, with lagging prices, the market would have struggled to absorb the $21 million of SOL (or 20% of collateral) that would have been automatically liquidated. The loan protocol would have risked losing almost all of its SOL loan pool at very low rates.

And the liquidators’ scramble to buy SOL’s $21 million at fire sale prices would have put the Solana network to the test, wrote Solend’s pseudonymous co-founder. Root.

“This could cause chaos and strain the Solana network,” they wrote in the blog post. “Liquidators are said to be particularly active and spamming the liquidation feature, which has been known to be a factor causing Solana’s downfall in the past.”

After convincing the borrower to transfer some of its debt to another protocol, Solend managed to reduce some of its exposure, but did not eliminate it entirely. The borrower still owes the protocol $84 million.

The community has taken steps to mitigate this risk, or at least prevent it from happening again.

Earlier today, the Solend community voted by an overwhelming majority approve a proposal that would impose a borrowing limit of $50 million per account and adjust the smart contract (the computer code that governs the lending protocol) so that it temporarily liquidates 1%, not 20%, of deposits on under-secured loans.

The Challenge loan protocol, its name a portmanteau of the words “Solana” and “lend”, began trying to contact the borrower last week when it looked like the SOL 5.7 million deposit securing a $108 million stable loan (US Dollar Coin and Tether), could be liquidated if the price of SOL falls to $22.30.

Rooter, the co-founder, even put forward a proposal, titled “SLND1”, to take control of the account so the collateral could be liquidated in an organized way that wouldn’t clog (and potentially crash) the network. Solana. But after vote in favor of this planthe community knocked him down.

“We have listened to your criticisms of SLND1 and the way it has been conducted,” the Solend team wrote of the proposal to invalidate the vote after receiving comments that 24 hours had not been enough for the members vote.

At the time, markets were reeling from news that crypto lender Celsius had frozen withdrawals to prevent a bank run and $3 billion hedge fund Three Arrows Capital was negotiating with its creditors to stay solvent.

Solend works the same way as many other lenders in Challenge, which is a term used for noncustodial applications that allow users to trade, borrow, and lend crypto assets without any third-party intermediaries, such as banks. On Solend, users deposit collateral – currently 47 different coins and tokens across 18 liquidity pools – and borrow crypto assets worth up to 75% of their collateral.

Using crypto to secure loans on any blockchain has been particularly risky in the turbulent market. In May, Lido took to Twitter to warn borrowers that the Ethereum they had deposited to borrow Lido Staked Ethereum (stETH) could be liquidated.

A similar problem arose last week when a large borrower, at the time considered the capital of the three arrowsattempted to avoid the liquidation of $300 million in loans from DeFi lenders Aave and Compound.

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