Solend SLND/USD, a decentralized finance (DeFi) lending and borrowing platform, just lately highlighted the scarce decentralization most such initiatives face, because it tried to defuse a ticking bomb that may wreck Solana’s SOL/USD DeFi ecosystem and its liquidity.
What Occurred: In line with Solend governance proposal SLND1, accredited three days earlier than press time, a single whale had deposited 5.7M SOL (price $170M on the time), equal to 25% of the protocol’s whole worth locked (TVL), which was used as collateral to borrow $108 million price of USD CoinUSDC/USD and Tether USDT/USD.
The consumer was additionally answerable for 95% of Solend’s SOL deposits, and 88% of its excellent USDC borrows.
If Solana’s value reaches a value of $22.30, the consumer’s mortgage can be liquidated via the on-chain DeFi ecosystem, which can be unable to course of it with its restricted liquidity. The proposal claims that “letting a liquidation of this measurement to occur on-chain is extraordinarily dangerous” and “might trigger cascading results.”
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This has been acknowledged as a systemic danger by Solend’s workforce members, who proposed in SLND1 to set a liquidation threshold of 35%, as a substitute of 20%, and grant emergency powers to the Solend Basis to manually promote funds from such giant orders on over-the-counter markets to keep away from a system collapse.
The voter participation was not notably excessive, with only one.19% of SLND tokens getting used to vote. Much more alarming was that over a million of the full tokens (almost 85% of tokens used to vote) have been held by a single consumer.
Shortly thereafter, Solend’s neighborhood submitted one other proposal, SLND2, which might invalidate the previously-approved rule change, improve governance vote time to in the future and begin work on various measures to lower the systemic danger. This proposal was accredited on the subsequent day with the participation of 1.49% of the full tokens.
Lastly, on Tuesday the neighborhood accredited SLND3: a proposal introducing a per-account borrow restrict of $50 million, with something exceeding this being eligible for liquidation no matter different components. The rule can be utilized regularly, beginning with a $120 million restrict that can be decreased by $500,000 per hour.
This proposal additionally quickly reduces the utmost liquidation shut issue from 20% to 1% to cap the quantity that may be liquidated in a single transaction. One other non permanent change is a discount of the liquidation penalty for SOL from 5% to 2% to scale back liquidation spam whereas nonetheless offering market individuals sufficient incentive to compensate for the slippage.
Benzinga’s Take: This debacle highlights the shortcomings of DeFi, particularly in terms of decentralization.
Sadly, the extra complicated a system is, the tougher it’s to automate it in a approach that enables a totally hands-off method with (almost) no human intervention.
Bitcoin’s blockchain managed to maneuver forex from one level to a different for over 10 years with almost no human intervention, with the infamous exception of 2010’s value overflow incident.
Now, with complicated DeFi ecosystems, unexpected components akin to Solend’s latest incident are extra frequent, and giving full management to prewritten code is commonly inadvisable.
Even in situations the place it may be utterly automated, DeFi companies can hardly be absolutely decentralized given their reliance on off-chain market information, which is imported via not-so-centralized oracles.
With out this information — which can’t be obtained natively on-chain — DeFi markets might commerce at costs impartial from their centralized counterparts and their restricted liquidity would make them much more susceptible to market manipulation with comparatively scarce capital.
In fact, sooner or later, it might turn into potential for DeFi markets to function with out oracles after reaching liquidity ranges excessive sufficient to anticipate market forces to stabilize their costs on their very own. Till then, DeFi is a largely experimental business that’s rising quick and breaking issues on its approach to additional progress and maturity — a part by which we will hardly anticipate it to maintain true to its purported decentralization.