What happens if you don’t answer the phone when a million-dollar margin call comes in?
Last week, this scary possibility almost came true in Solend, which is the second-largest decentralized finance (DeFi) colony in Solana. One of its biggest customers, a wallet with $107 million in USDC loaned against $170 million in SOL collateral, was completely missing and on the verge of going bankrupt.
Developers used Reddit posts, on-chain messages, and even Twitter jokes to try to let the anonymous account know that it was about to be shut down. To stop a disastrous on-chain liquidation that, according to project leaders, could bring down Solend and maybe even Solana, the whale account had to either put up more collateral or lower its stake.
The rush to save Solend turned into a fight over who was in charge and how things were run, which led to accusations of hypocrisy against DeFi on Crypto Twitter and elsewhere.
Binance, a giant in the CeFi market, finally woke up the whale, said Rooter, a made-up co-founder of Solend who talked to CoinDesk. The largest cryptocurrency exchange in the world sent a message to the account on behalf of Rooter.
Images sent to CoinDesk show that the user wrote to Rooter on June 21 and said, “I’m sorry that this problem has made the Solana community and team nervous.” “The current plan for running the country hasn’t made anyone angry.”
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Once the whale got in touch and started moving its Solend bets to other Solana DeFi outposts like Mango Markets, the worst crisis was solved without any cascade liquidations. Even though there was a lot of short-term Schadenfreude, the price of SOL has gone up enough to calm down the situation.
The volatile crypto markets shook DeFi protocols of all kinds, which caused Solend’s liquidation to fail. This meant that supposedly decentralized governing bodies had to make hard decisions that would affect protocol users for a long time.
That can make the drink messy. In “decentralized finance,” smart contract code that can’t be changed by human biases, like when a banker turns down a loan for a minority group, is meant to be the unchangeable law of the land.
Of course, real life isn’t that simple.
Solend was in a tough spot because its protocol did not put any limits on the size of a borrower. As a result, a single whale was responsible for most of Solend’s USDC loans and SOL collateral. If the price of SOL fell too low, there was a chance that the collateral would have to be sold.
When a user’s collateral gets too low, Solend’s smart contracts send liquidation sell orders to DEXs automatically. They have been set up in every way. They don’t think carefully about whether a deal will cause the markets or, worse, the whole chain to fall.
not a day
Even though SOL trades for billions of dollars every day, most of this takes place on centralized exchanges instead of DeFi’s cousin Solend’s much less busy DEXs. Because DEXs don’t have enough cash on hand to handle the whale’s dump, the price of SOL would drop (by as much as 60% or 80%) until buyers arbitraged it back up.
Rooter said that this was a problem in and of itself: “There’s such a huge chance of art arbitrage and liquidation that bots would swarm right away.” In the past, doing something like this took down the whole Solana blockchain.
Solend made sure that he went through the most pain. Bad debt, a smaller bank account, and unhappy users would be the results. Rooter said that if the smart contracts worked as planned, “it’s pretty much over for us, and our users would lose a lot of money.”
He thought back to the outreach program and said, “We have to do something right now.
unanswered phone calls
In traditional finance, bankers may handle a similar problem by making a “margin call” to a customer to explain the risks and the need for more collateral to secure a loan. They know who their counterparties are, and they can reach the borrower by phone or email. This is not the case with pseudonymous DeFi (though a handful of startups are working on inter-wallet messaging solutions, none of which Solend used).
Since they couldn’t talk quietly, Rooter posted a message on Twitter to get the whale’s attention. People were scared, so they took out a lot of money from Solend, just like they would during a bank run. Rooter admits that the tweets didn’t work.