The Solana Shitshow

"DeFi" platform Solend votes to appropriate largest user's funds

Despite the parabolic price performance over the course of 2021, Solana has been forced to reckon with a litany of complaints and difficulties, most notably that the blockchain is so centralised, faulty, and useless, that there’s really no point to it.

Ushered in by the fast transaction times and low speeds, many investors completely eschewed the notion that decentralisation was an important aspect of blockchains, despite the fact that it is one of the only reasons that blockchains are necessary in the first place.

Recently, I have been writing about the ways in which the recent collapses have not been the fault of those protocols and platforms that are truly decentralised, and that there is no existential risk to such platforms, since they are far more conservative in terms of managing risk, highly liquid, and completely transparent. Blue chips in the world of cryptocurrency haven’t broken a sweat during the last month: Bitcoin has shrugged off the volatility and continues to mine a new block every 10 minutes, Ethereum continues to function as it ought to, and major DeFi protocols on top of Ethereum are also functioning as promised. The collapses have been largely been the result of opacity and poor risk management on behalf of people who really ought to know better.

All Turing complete blockchains, if they are to gain traction in the space, need to have a variety of different protocols running on top of them. Some of the most important of these protocols include Automated Market Makers (AMMs) like Uniswap, and lending protocols like Aave. Without these protocols, the blockchains will struggle to achieve adoption, and will be lacking in utility.

Solend is Solana’s equivalent of Aave/Compound, and they have been confronted with quite an unusual problem. It appears that of the circa $250m deposited to their platform, an extraordinarily high portion of these assets belonged to just one whale. The whale has deposited 5.7 million SOL to to Solend, which accounts for 95% of the total SOL deposited, and has borrowed over $100m in stablecoins, accounting for about 88% of the total borrowed. Such a high concentration is concerning, especially when one considers that a mere 50% drop in SOL would cause an extreme liquidation cascade. How bad would this liquidation cascade be? The whale would have been forced to have sold all of his assets were the price to reach $22 (SOL currently sits at $34), and the sheer enormity of this selling could cause a near-instant 80% decline due to the lack of liquidity. Not only this, but it would completely break Solend as a protocol.

The Solend team thus decided that they would try to reach out to the whale via on-chain messages and on Twitter, to try and encourage them to slowly begin to deleverage. Unfortunately, it seems as though they were not able to discover who it was, and the whale has been largely unresponsive until now. Faced with the imminent collapse of their protocol, the Solend DAO decided that urgent steps needed to be taken — such a liquidation cascade wouldn’t only be problematic for Solend but also for the Solana ecosystem as a whole.

Hence, a rather unorthodox vote was put to the DAO, in which the community was asked to consider that the best course of action would be to grant emergency powers to Solend Labs to appropriate the whale wallet’s funds via a smart contract upgrade, before gradually selling his assets with OTC trades. This is clearly a contentious decision to make, since it directly contravenes one of the main pillars of DeFi: that the financial system is to be as egalitarian as possible and that everyone is to be treated the same.

Solend Labs were pleased to announce that the vote passed with 97.5% support, but to cite this statistic without the necessary caveat of context is highly misleading. Voter apathy in DAOs is a huge problem (see PieDAO for solutions), and engagement was relatively low on this vote. Not only this, but the high degree of concentration of governance tokens meant that this decision wasn’t really a decentralised governance vote in which all the concerns of the community could ever have been relevant. 97.5% seems like a complete landslide until one realises that over 90% of the voting power belonged to just one wallet, as demonstrated in the graphic below.

Even more bizarre is the fact that this decision, which affects over $250m in assets, only cost $700k in governance tokens to pass.

Decentralised In Name Only (DINOs)

The raging debate over what constitutes a security in a world of tokenisation has been quite contentious in recent months, but Gary Gensler, Chair of the SEC, has been quite clear that the overwhelming majority are almost definitely unregistered securities, since they were issued pursuant to an expectation of profit, and are DINOs. Solend’s problem is not only that a small number of users have extremely disproportionate power over the funds on the protocol, but that they did not adequately plan for too much centralisation in their user base. What they could have done beforehand would have been to reduce borrowing limits and require higher ratios of collateralisation. Unfortunately, the lack of foresight has forced them to show their hand.

Solend is a centralised disaster, built on a centralised blockchain that doesn’t even work half the time. The result of this is that user funds are not safe (ironically the users who support the protocol the most), and that there is a high risk of contagion for the rest of the Solana ecosystem. It remains to be seen how this will pan out, but even if these OTC trades are executed successfully, this debacle has been yet another blot on the Solana ecosystem, which was already struggling to justify itself as not being a total shitshow.