Why the crypto ecosystem turned its attention to the Solend protocol

Amid a falling market, Solend finds itself in a difficult position due to a “whale” whose position could be liquidated if the solana cryptocurrency falls below $22.30.

An event in the world of decentralized finance (DeFi) is shaking the entire ecosystem. We remind you that DeFi is an open financial system available to any user that allows you to perform some traditional financial transactions, such as loans.

To date, investors’ eyes have been on Solend’s lending protocol, which is currently in disarray. We remind you that lending is a loan in cryptocurrency provided to the borrower at interest. Thus, the Solend protocol allows its users to deposit funds, and in exchange for these funds, they can take out loans to invest in the market.

These are secured loans, which means that the user can actually borrow money by “mortgaging” another asset (another cryptocurrency), what is called collateral. If the value of this asset falls below a certain predetermined level, its position is partially or completely liquidated.

“Solana may be left with bad debts”

What happened to the Soland protocol? An anonymous user deposited 5.7 million solans (equivalent to $170 million) to borrow $108 million in USDC and USDT stablecoins from Solend’s main liquidity pool, which has 16 liquidity pools. His loan alone accounts for 95% of Solana deposits in this pool and 88% of USDC. This makes him a “whale”, i.e. an actor who holds a lot of cryptocurrencies in a certain place and can have a huge weight in the market.

However, a portion of his position (20% of the total) must be liquidated if the solana falls below $22.30. Indeed, with cryptocurrencies plummeting, the solana cryptocurrency experienced various price fluctuations last week, dropping to $27.

“If the solana cryptocurrency falls below $22.30, the whale’s account will become liquid for a maximum of 20% of its borrowings (~$21 million). It will be difficult for the market to absorb such influence as liquidators typically sell on decentralized exchanges (DEXs). ). At worst, Soland could be in bad debt. This could cause havoc, putting a strain on Solana’s network. Liquidators will be especially active and will spam the liquidation feature, which is known to be a factor in causing Solana to crash. in the past. Due to the risks involved, many users opted out, resulting in a dramatic increase in usage. “USDC and USDT are in the main pool at 100%. This means that depositors cannot withdraw funds and positions backed by USDC or USDT cannot be liquidated. “, the team said on Sunday.e of the Soland protocol.

As required by the principle of decentralized finance, many entities control – with the help of bots – various blockchains in search of delinquent loans for liquidation: thus, if the cryptocurrency falls below a certain threshold (here $ 22.30), the latter thus ensure that the accounts protocols are healthy. In decentralized finance, if the bots were to liquidate a loan, they would have to resell the collateral on decentralized exchanges (DEXs).

However, “on Solana, the DEX does not have enough liquidity to support the sale, so this would lead to a sharp drop in the price of the solana cryptocurrency, which means who says a fall, says new liquidations, and therefore potentially other mass liquidations in DeFi,” explains BFM Crypto Renaud. Heitz, journalist for the specialized publication Journal du Coin.

“A decision that goes against decentralized finance”

In this regard, the developers of the Solend protocol, who were unable to receive news from the user despite the tweet, forced their community to vote on Sunday to gain control of that user’s position. This proposed vote, which lasted six hours, was accepted.

However, this decision has been the subject of numerous criticisms on social media as it is in conflict with the DeFi system.

“The Solend protocol wanted to take control of the user’s funds, resell them to an actor in exchange for a borrowed amount, and re-enter it into the protocol. However, this decision is not up to them. If the elimination of risk is real, this decision goes against the very system of decentralized finance,” continues Renaud Heitz.

Therefore, in the face of much criticism, Solend did not eliminate the user’s position and made a new proposal for a vote in order to cancel the old proposal. This new proposal was accepted on Monday morning and things are back to square one. Therefore, the developers of the Solend protocol are looking for new solutions to the problem.

Therefore, the eyes of individuals and investors are riveted to this lending protocol, which will have to find solutions in the coming hours to overcome a potential liquidity crisis.

“At this stage, user funds are not at risk, only people who have taken out loans under the protocol can see their loans liquidate in the event of a liquidation cascade. Therefore, we are waiting for news about this new vote to find out new alternatives. They may turn to players who can keep the Solana system running, or the protocol may use some of their money to avoid the elimination cascade,” concludes Renaud Heitz.

At 12:15 p.m., the price of the solana cryptocurrency is about $34.