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Is This The Endgame of Decentralization in DeFi?

By June 20, 2022June 30th, 20224 minute read
Note: This blog is written by an external blogger. The views and opinions expressed within this post belong solely to the author.

The crypto market’s record-breaking meltdown has forced a series of DeFi applications and their communities to rush to safeguard themselves against a wave of liquidations, sometimes by taking extreme steps.

Solana is currently in a terrible spot. Several times, the network has come to a standstill, and the price has plummeted. Any additional downward pressure on its price might cause investors more remarkable anguish and losses. Something is coming, though, as a massive liquidation on Solana’s Solend protocol.

A whale just deposited 5.7 M SOL worth around $170 million and borrowed $108 million USDT and USDC. Due to the possibility of liquidation, Solend on the Solana network advises acquiring the user’s funds and preventing the liquidation.

Before we move further, let’s briefly overview what whales are.

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What are whales?

Whales are the world’s most giant mammals, and the crypto world is no exception. Individuals or groups holding or hoarding the most bitcoin are called “crypto whales.”

They are strong investors. When a person has the capacity to affect the value of a currency by a massive amount, he is referred to as a whale. So when you witness a large and abrupt surge in the value of your currency on the chart, you can be confident that one or more whales are impacting the price.

Importance of crypto whales

Crypto prices are determined mainly by supply and demand. When a significant portion of a coin’s supply is held out of circulation, the price of the coins that remain in circulation increases.

As a result, the value of a massive quantity of coins will drop if they are unexpectedly liquidated. As a result, whales have a one-of-a-kind potential to influence the crypto market to their benefit.

Let’s look at what crypto liquidation means to grasp better what’s going on with Solend, the Solana-based DeFi lending platform.

What is crypto liquidation?

Liquidation is a type of the process of selling crypto assets for cash to reduce losses, particularly in the case of a market meltdown.

However, in the crypto world, the term “liquidation” refers to a trader’s position being forced to close owing to a partial or entire loss of the trader’s initial margin. This occurs when they are unable to fulfill the margin requirements for their leveraged position – that is, they do not have enough cash to keep the trade open. In addition, when the price of the underlying asset drops suddenly, margin needs are frequently underfunded.

When this occurs, the exchange will liquidate the trade automatically, resulting in a loss of dollars for the investor. The severity of the loss will be determined by the starting margin and the price decline. However, it might result in a total investment loss in rare situations.

After understanding the base of this article, it’ll be easy to know what’s happening with Solend.

What’s happening at Solend Labs?

Solend is a decentralized algorithmic lending and borrowing protocol on Solana that allows you to earn interest on deposits and borrow assets.

According to Solend, if the price of Solana (SOL) declines and the whale is liquidated, the lending platform may “end up with bad debt” and burden the Solana network. The idea was approved, outraging criticism from the community members.

The Solend team conducted a second governance proposal vote to invalidate the previously-approved plan as the community denounced the move, calling it the polar opposite of what DeFi should be and simply illegal. The recommendation to disregard the “SLND1: Mitigate Risk From Whale” proposal received 1,480,264 votes in favor.

The new plan nullifies the prior vote and will compel Solend to come up with a different solution that does not include forcibly taking over an account. It also cuts down the time it takes to vote on governance to one day.

The situation has put the crypto lending platform into a gruesome dilemma. If Solend succeeds at taking over the whale’s wallet and being granted emergency powers, it may save SOL from a DeFi implosion. However, this will show that anyone’s assets can be confiscated within the platform and can cause a boycott.

On the other side, others predict that if the Solend team is unable to address the concerns surrounding the whale’s account, it will cause a Solana meltdown, leading SOL’s price to plummet.

Final thoughts

Solend Labs has created a terrible trend by liquidating whale accounts using “emergency powers.” Controlling wallets under the pretext of reducing liquidity concerns is no way to ensure the stability of DeFi systems. Unfortunately, with DeFi, this has become the norm.

In DeFi, the illusion of decentralization is more visible than ever. But unfortunately, decentralized Finance (DeFi) protocols have drifted from decentralization’s founding principles, progressively leaning toward bureaucracy and restriction.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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Shashank is an ETH maximalist who bought his first crypto in 2013. He's also a digital marketing entrepreneur, a cosmology enthusiast, and DJ.

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