Why the crypto ecosystem has its eyes on the Solend protocol

Amid a declining market, Solend is in a tricky spot over 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. As a reminder, DeFi is an open financial system, accessible to any user, that allows certain traditional financial operations, such as loans, to be performed.

To date, investors’ eyes are on the Solend loan protocol, which is currently in turmoil. As a reminder, lending is a cryptocurrency loan that is provided to a borrower for interest. So, the Solend protocol allows its users to deposit money and in exchange for this money they can take out loans to invest in the market.

These are collateralised loans, which means that a user can actually borrow money by “pledging” another asset (other cryptocurrencies), which is called a collateral. If the value of this asset falls below a predetermined level, all or part of its position will be liquidated.

‘Solana could end up with bad debts’

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

However, part of its position (20% of the total) would have to be liquidated if the solana cryptocurrency were to fall below $22.30. Indeed, in the context of a sharp decline in cryptocurrencies, the solana cryptocurrency experienced several price variations last week, reaching a low of $27.

“If the solana cryptocurrency falls below $22.30, the whale account will be liquidated for up to 20% of its loans (~$21 million). It would be difficult for the market to absorb such an impact, as liquidators usually sell on decentralized exchanges (DEXs). In the worst case scenario, Solend could end up with bad debts. This could cause chaos and put pressure on the Solana network. Liquidators would be very active and spam the liquidation function, which is known that it is a factor that caused the demise of Solana in the past.Due to the risks involved, many users have opted out, increasing the usage rate.” USDC and USDT in the main pool at 100%. This means that depositors cannot withdraw and positions backed by USDC or USDT cannot be liquidated,” the team said on Sunday.

As the principle of decentralized financing requires, many actors – through bots – monitor the different blockchains in search of defaulting loans to liquidate: so if a cryptocurrency falls below a certain threshold (here $22.30), the latter take care of it. So for that the accounts of the protocols are sound. In decentralized financing, in the event that bots liquidated the loan, bots would have to resell the collateral on decentralized exchanges (DEXs).

However, “on Solana, the DEXs do not have enough liquidity to support the sale, so this would have led to a sharp drop in the price of the Solana cryptocurrency, and therefore, who says decline, says new liquidations, and thus possibly other mass liquidations within the DeFi,” explains BFM Crypto Renaud Heitz, journalist for the specialist media Journal du Coin.

“A decision that goes against decentralized finance”

In this context, the developers of the Solend protocol, which did not receive any news from the user despite a message on Twitter, had their community vote on Sunday so they could take over this user’s position. This proposed vote, which lasted six hours, was accepted.

However, this decision has been the subject of numerous criticisms from social networks for being against the DeFi system.

“The Solend protocol wanted to take over the management of a user’s funds, sell them on to an actor in exchange for the loan amount and inject it back into the protocol. However, it is not for them to make this decision. If the risk of liquidation is real, this decision goes against the system of decentralized finance,” continues Renaud Heitz.

Faced with a lot of criticism, Solend has therefore not liquidated the user position and made a new voting proposal, aiming to drop the old proposal. This new proposal was adopted on Monday morning, bringing the situation back to the starting point. The developers of the Solend protocol are therefore looking for new ways to solve the problem.

The eyes of individuals and investors are therefore focused on this loan protocol, which will have to find solutions in the coming hours to cope with a possible liquidity crisis.

“At this stage, user funds are not at risk, only people who have borrowed on the protocol can see their loans being liquidated in the event of a liquidation cascade. We are therefore waiting for news of this new vote, to know the new alternatives. They could call on players who can keep the Solana system healthy or the protocol could use some of its money to avoid the liquidation cascade,” concludes Renaud Heitz.

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

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