When it comes to the cryptocurrency network, decentralization is a crucial pillar. It maintains trust between a crypto platform and its users. However, earlier this week, on Sunday, 19 June 2022, Solend, Solana’s DeFi lending protocol, took a jab at decentralization by trying to take control of one of its most significant users’ wallets.

Why would Solend make such a move?

If you have been following the crypto market, then you know that we are in one of the most gruesome bear markets (downtrend) in the history of cryptocurrencies. For DeFi lending protocols, this is particularly risky since most of their users, if not all, are at the risk of liquidation. 

This means that if your collateral asset’s price falls to near or below your loan value, then the DeFi platform will have to sell your crypto collateral to repay your loan. However, in some cases, the price may fall much faster than the DeFi protocol would be able to pay out your loan. This would leave the lender and the DeFi protocol in debt.

According to Solend, this was their primary worry. The whale (a wallet with a large crypto deposit) in question is its largest user with a 5.7 million SOL deposit, which is collateral for a $108 million loan. The 5.7 million SOL accounts for 95% of Solend’s pool deposits. 

If SOL dropped to $22.30, the whale ran the risk of getting liquidated up to 20% of its initial loan, which accounts for about $21 million. The Solend team went ahead to quote that at such a time, it would be difficult for their platform to absorb such a hit since most liquidators sell on decentralized exchanges (DEXs) or, in the worst case, their platform would end up in debt. 

They further responded by stating that the wallet’s address was unresponsive and that immediate action was needed. As a result, the Solend team gave their users a mere six hours to vote on the proposal to take over the wallet, and it was approved. The proposal was named SLND1: Mitigate Risk From Whale.

The community backlash to Solend’s move

Although Solend passed the initial proposal without much hostility, a fierce backlash from the crypto community followed. Most experts referred to it as a direct violation of the concept of decentralization and what the cryptocurrency community stands for.

Some, such as Delphi Labs General Counsel Gabriel Shapiro, did not shy away from airing out their views on social media. Shapiro accused Solend of not only setting a bad example for the crypto community but calling what they did outright illegal.

Solend’s response 

After the community condemned their actions, Solend responded through a blog post stating, “We’ve been listening to your criticisms about SLND1 and how it was conducted. The price of SOL has been steadily increasing, buying us some time to gather more feedback and consider alternatives.”

The Solend team also initialized a new proposal on Monday morning termed SLND2, which also proposed the increase of voting period to one day as the team came up with another alternative solution. The proposal ended with 1,480,264 votes in favour of disregarding the SLND1 proposal.

solend proposal

What does this mean for decentralization?

The situation has put the crypto lending platform and the crypto community in a dilemma. If cryptocurrency projects can be granted the power to control whales, this would minimize whales’ power over the market. Furthermore, this would directly violate the core concepts of a decentralized cryptocurrency ecosystem.

This would show that projects have the power to confiscate your assets without your approval. As a result, most users would shift to more decentralized projects leading to the collapse of rather ‘centralized’ projects. 

On the other hand, if whales are allowed to act as they please, there is the potential that they would manipulate the cryptocurrency market. Some believe that in the case of Solend, the whale could trigger a Solana meltdown causing SOL’s prices to dump heavily. 

However, this is not new in the crypto space. More decentralized cryptocurrencies like Bitcoin have hundreds of whales who, at any moment, could sell their BTC and dump BTC’s prices. As a result, the main question is, does a cryptocurrency platform trust that its community will maintain the network to allow total decentralized governance?