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Solend

Rooter
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Jun 19

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3 min read
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SLND1: MITIGATE RISK FROM WHALE



This is a copy of the governance proposal to be posted at
https://realms.today/dao/7sf3tcWm58vhtkJMwuw2P3T6UBX7UE5VKxPMnXJUZ1Hn.



Dear Solend community,

As you may know, the largest user on Solend
(3oSE9CtGMQeAdtkm2U3ENhEpkFMfvrckJMA8QwVsuRbE) has an extremely large margin
position that is putting Solend protocol and its users at risk. Here are details
about the user at the time of writing:

 * 5.7M SOL deposited ($170M)
 * 108M USDC and USDT borrowed
 * 25% of TVL
 * 95% of SOL deposits (Main Pool)
 * 88% of USDC borrows (Main Pool)
 * A liquidation price of $22.30
 * The last on-chain activity from the whale was 12 days ago

This is causing issues on the platform:

 * If SOL drops to $22.30, the whale’s account becomes liquidatable for up to
   20% of their borrows (~$21M). It’d be difficult for the market to absorb such
   an impact since liquidators generally market sell on DEXes. In the worst
   case, Solend could end up with bad debt.
 * This could cause chaos, putting a strain on the Solana network. Liquidators
   would be especially active and spamming the liquidate function, which has
   been known to be a factor causing Solana to go down in the past.
 * Due to concerns about risk, many users have withdrawn, causing USDC and USDT
   utilization in the Main Pool to spike to 100%. This means depositors can’t
   withdraw, and positions collateralized by USDC or USDT can’t be liquidated.




WHAT WE’VE TRIED

 * Since June 13, we’ve attempted to get in touch with the whale via our
   networks and publicly through Twitter.
 * Sent the whale an on-chain message and posted about it on Twitter for
   amplification.
 * USDC and USDT borrow rates have automatically adjusted to their max APY of
   >60% and >600% for hours, according to the dynamic interest rate model.
 * Been in contact with market makers to explore options for ensuring the
   liquidation happens gracefully (OTC deal, placing bids on DEXes and hedging
   elsewhere).
 * Had discussions with concentrated liquidity AMM protocols to explore
   incentivizing liquidity at critical levels so liquidation can happen
   gracefully.

Despite our efforts, we’ve been unable to get the whale to reduce their risk, or
even get in contact with them. With the way things are trending with the whale’s
unresponsiveness, it’s clear action must be taken to mitigate risk.


OPTIONS

After much thought, deliberation, and conversations among the team, investors,
and users, here are our thoughts.

 * We shouldn’t do nothing. At this size, the whale will always present a
   systemic risk to Solend and its users. They’re showing no signs of action,
   and it seems inevitable that they’ll eventually allow themselves to be
   liquidated.
 * Letting a liquidation of this size to happen on-chain is extremely risky. DEX
   liquidity isn’t deep enough to handle a sale of this size and could cause
   cascading effects. Additionally, liquidators will be incentivized to spam the
   network in an effort to win very lucrative liquidations. This has been known
   to cause load issues for Solana in the past which would exacerbate the
   problems at hand.

Any action we take (including inaction) has a set of trade offs to consider.
There is no perfect solution. With that in mind, the action we believe would
result in the best outcome is as follows:

 * Enact special margin requirements for large whales that represent over 20% of
   borrows. If a user’s borrows amount to over 20% of all borrows for the Main
   Pool, a special liquidation threshold of 35% is required. This policy will go
   into effect upon approval of the proposal.
 * Grant emergency power to Solend Labs to temporarily take over the whale’s
   account so the liquidation can be executed OTC and avoid pushing Solana to
   its limits. This would be done via a smart contract upgrade. Emergency powers
   will be revoked once the whale’s account reaches a safe level.


VOTE

Vote Yes: Enact special margin requirements for large whales that represent over
20% of borrows and grant emergency power to Solend Labs to temporarily take over
the whale’s account so the liquidation can be executed OTC.

Vote No: Do nothing.

We’re extremely thankful for your support.

Yours truly,
Solend Team




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