Why the crypto-ecosystem looks at the Solend protocol

Against the background of the falling market, Soland is at a dead end due to the “whale”, whose position can be eliminated if the cryptocurrency Solana falls below $ 22.30.

An event in the world of decentralized finance (DeFi) is shaking the whole ecosystem. It will be recalled that DeFi is an open financial system available to any user, which allows you to perform certain traditional financial transactions, such as loans.

To date, investors’ eyes are fixed on the Solend lending protocol, which is currently in turmoil. It will be recalled that lending is a cryptocurrency provided to the borrower at interest. Thus, the Solend protocol allows its users to invest, and in exchange for these funds they can borrow to invest in the market.

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

“Solana may have bad debts”

What happened to the Solend protocol? An anonymous user contributed 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. Only his loan accounts for 95% of Solana’s deposits in this pool and 88% of USDC. This makes him a “whale”, ie an actor who keeps a lot of cryptocurrency in a certain place and who can have a huge weight in the market.

However, part of its position (20% of the total) should be eliminated if the cryptocurrency Solana falls below $ 22.30. Indeed, in the context of a sharp decline in cryptocurrencies, cryptocurrency Solana last week experienced various price fluctuations, falling to $ 27.

“If the cryptocurrency Solana falls below $ 22.30, the whale’s account becomes liquid by a maximum of 20% of its loans (~ $ 21 million). It would be difficult for the market to absorb such influence, as liquidators usually sell on decentralized exchanges (DEXs). ). In the worst case, Solend may have bad debts. This can cause chaos, creating a load on the Solana network. Liquidators will be particularly active and spam the liquidation function, which is known to be the cause of Solana’s downfall in the past. Due to the associated risks, many users refused, which led to a sharp increase in the level of use. “USDC and USDT are basically 100% pools. This means that depositors cannot withdraw, and positions backed by USDC or USDT cannot be liquidated,” the Soland protocol team said on Sunday.

Because the principle of decentralized financing requires many entities to control – with the help of bots – various blockchains in search of overdue loans for liquidation: thus, if the cryptocurrency falls below a certain threshold (here $ 22.30), the latter ensure that account protocols are healthy . In the case of decentralized financing, if the bots had to liquidate the loan, they would have to resell the collateral on the decentralized exchanges (DEX).

However, “Solana DEX does not have enough liquidity to support sales, so this would lead to a sharp drop in the price of cryptocurrency Solana, and therefore who says the fall, speaks of new liquidations, and therefore potentially a different mass of liquidation under DeFi,” – explains BFM Crypto Renault Heitz, journalist of the specialized media Journal du Coin.

“Solution that contradicts decentralized finance”

In this context, the developers of the Solend protocol, who failed to receive news from the user despite the message on Twitter, voted in their community on Sunday so they can control this user’s position. This proposed vote, which lasted six hours, was adopted.

However, this decision has been the subject of much criticism on social media, as it contradicts the DeFi system.

“The Solend protocol wanted to take over the management of the user’s funds, resell them to the subject in exchange for the borrowed amount and re-enter it into the protocol. However, this decision does not depend on them. If the elimination of risk This decision contradicts the system of decentralized finance, “- continues Renault Heitz.

Faced with much criticism, Solend did not eliminate the user’s position and made a new voting proposal in order to cancel the old proposal. This new proposal was accepted on Monday morning, returning the situation to its starting point. Therefore, the developers of the Solend protocol are looking for new solutions.

Thus, the eyes of individuals and investors are fixed on this lending protocol, which must find a solution in the coming hours to overcome the potential liquidity crisis.

“At this stage, users’ funds are not under threat, only people who borrowed according to the protocol can see their loans liquidated in the event of a liquidation cascade. So we are waiting for news about this new vote to know new alternatives. They could call on players who can keep the Solana system up and running, or the protocol could use some of its money to avoid a liquidation cascade, ”concludes Reno Heitz.

At 12:15, the price of the Solana cryptocurrency is about $ 34.