Solend Whale Manipulation Event — What Happened Exactly? Explained Briefly

Solend is one of the major lending/borrowing market on Solana blockchain network. Earlier this week, the already bearish crypto market saw a huge scare as the DeFi service provider came under a large liquidation watch which had potential to crash the network (Think back to terra/luna crash). The various governance measures taken by the firm to prevent such a meltdown had been focus of the market so far.

Was it really a scare or just a random hype, what happened in the end?

Solend is currently the largest lending market on Solana ecosystem and as such it was a huge whale deposit 5.7 million SOL tokens worth about US$170 million as collateral to borrow US$108 million worth of USDC and USDT tokens. This single transaction alone took up a huge majority of their borrowing capacity/positions in the dApp. It should be noted that it is common practise among DeFi dApps to deposit a higher volume of tokens in collateral when you wish to borrow against other tokens. A sharp drop in price of token used for collateral would usually lead to on-chain liquidation if the user(whale) fails to close their position before same. This is a very commonly seen occurrence in some of other popular DeFi service providers like Compound or AAVE.

In this case however, given the recent bearish market conditions and decline in price of SOL tokens, if the whale failed to close the position before the price of SOL hit a critical mark of US$22.30, Solend believed it could lead to huge cascading liquidation effect across multiple DeFi apps built on Solana network and this could lead to potential crash of the ecosystem. Solend tried to contact the whale to try and rearrange his loan terms which was initially refused by the whale.

In-case the on-chain liquidation went through, the firm believed that it would cause strain on Solana network given the illiquid market conditions. The DEX liquidity pool was found not to be deep enough to handle an on-chain liquidation of this size and there was also the fear of liquidators possibly spamming the network for better returns. This could have led to mass hysteria in the market and there were further speculations of hedge funds and other major players pulling out their funds if such an event were to happen. This could both crash the network and also price of Solana tokens to drop to historic lows.

Contingency Measures & Its Aftermath

Given un-co-operative communication with the whale, the team behind Solend came up with a certain governance proposal which would give them emergency executive powers over the Whale’s wallet. This move was set to be voted upon via a DAO dubbed “SLND1” which would give the team power to liquidate the whale’s collateral wallet allowing them to sell the SOL tokens thereby preventing draining of liquidity pools.

In simpler terms, the proposal would allow the team to upgrade their smart contract enabling them to sell the SOL tokens manually in OTC trades thereby preventing Solana network from facing huge strain. This voting session however saw majority of the vote (nearly 90%) come from a single wallet which lead to huge uproar in the market. This move was viewed by many as anti-ethical to core DeFi principles and was also compared to centralised financial mechanisms. The fallout lead to the team calling another DOA vote “SLND2” in which the previous proposal was vetoed.

The team then came up with another DAO vote “SLND3” which proposed introducing Account Borrow Limit. Explained briefly, the team proposed setting up a limit of US$50million as borrowing limit for all users and any debt above this limit will be eligible for liquidation regardless of collateral vote. This move would be gradually rolled out by starting per account limit at US$120 Million and slowly reducing it until it reached US$50 million if the proposal was approved.

To prevent liquidity spamming while also facilitating enough gains for liquidators, the team temporarily reduced maximum liquidation close factor from 20% to 1% capping the amount liquidated in single transaction. Also, the liquidation penalty for SOL was reduced from 5% to 2% when the move was being carried out, so that the liquidators can still break even on slippage. This move was approved in a vote carried out on June 22, 2022 helping the team resolve ongoing crisis and also prevent such an event repeating itself in future.

So, what happened to the Whale whose deposit triggered this event?

The liquidation issue brought about by whale had initially completely blocked USDC utilisation across Solend network taking up 100% of its utilisation capacity. This served as major trigger for the event.

While the whale initially refused to restructure his debt, the team and whale came to an agreement later on to spread his position across other lending venues in Solana network and thus moving a part of USDC debt worth US$25 Million to Mango markets.

This happened before the third vote was proposed and while this did not solve Solend’s USDC utilisation problem, it opened up some of its USDC utilisation capacity. The team continued to work further with the whale, team mango markets and other players in a bid to help complete the restructuring of whale’s debt agreement and collateral deposit.

While this event may have caused quite a mayhem in market, price of SOL tokens managed to hold stably above $30 mark across the week. This led to his whole “Solend Whale Event” passing on as just another potentially feared and a little overly hyped market event this week.

However, this event dealt quite a severe blow to team Solend and has caused mistrust and misunderstanding in the community. Solend has responded by holding an AMA addressing this event in Reddit where they address some of market’s concerns and also firmly reiterated their stance and commitment to DeFi principles and practices.