“A lot of DeFi protocols are reducing counterparty exposure during this volatile time,” said Paul Veradittakit, a partner at Pantera Capital.
The DeFi apps’ communities are also rallying to make sure their apps don’t get damaged by things like bad debt: If a liquidator can’t sell illiquid tokens, or if the tokens’ prices collapse as they are being sold, the apps can end up being held responsible for reimbursements.
In the case of Solend, holders on Sunday voted overwhelmingly in favor of a proposal to take over a large user’s account temporarily after the app reached out to the user to no avail, bringing the threat of a massive liquidation closer. However, after criticism about the move, a second proposal was floated that would invalidate the first and work toward finding a new solution.
With the first proposal, the explanation went like this: Should a rash of bots start competing to trigger the liquidation, “this could cause chaos, putting a strain on the Solana network.”
By taking over the account, the Solend team could attempt to liquidate the position in such a way that the liquidated tokens’ price is less affected, through an over-the-counter sale with a specific buyer. It’s assumed the owner of the account that’s been taken over would benefit from any coin sale proceeds upon liquidation. But the move was highly unconventional, breaching the norms of DeFi and causing some on Crypto Twitter to bristle. And a single crypto address accounted for the lion’s share of tokens that voted for the proposal, seemingly undercutting to some the idea of “community” espoused by DeFi.
Most DeFi apps are governed by their token holders, who can put forward and vote on proposals on how to change or improve the app. Typically, proposals can involve creating a new product, or changing an app’s fee structure. Until now, most people assumed that a proposal to take over someone’s account wasn’t a possibility in DeFi, which attracts some users in part because of the idea it can protect them from overreach by a traditional financial business or a tyrannical government. With Solend’s situation, that assumption may be out the window — although its vote may sour anyone new from joining the community.
Could another DeFi realistically pull off something similar? At many of them, a handful of token holders hold the majority of the coins, and can influence or even control the outcome of votes. So technically, voters of other apps could implement a similar proposal — though it may cause a public outcry as well.
The second Solend proposal would invalidate the first one and increase governance voting time to one day, as well as “work on a new proposal that does not involve emergency powers to take over an account.”
“We recognize that a voting time of one day is still short, but we need to act swiftly to address the systemic risk and fact that normal users can’t withdraw USDC,” the proposal stated. “We ask our community to be active in governance in the next few days. Voting time will be revisited in a future proposal.”
The new proposal had 98.4% “yes” votes as of 12:25 p.m. in Hong Kong, with about three hours left to go in the voting.
DeFi in Debate
Solend’s moves come a day after MakerDAO, an app that supports stablecoin DAI, suspended the token from being deposited and minted in Aave’s crypto lending platform because of Aave’s exposure to a troubled derivative of Ether called stETH, which has become illiquid. The suspension prevents traders from borrowing DAI against stETH. On Aave’s governance forum itself, users are hotly debating how to reduce the risk from stEth, which DeFi risk tracker Gauntlet says “may pose further risk to the protocol.”
DeFi apps’ pain was triggered after centralized crypto lenders Celsius Network and Babel froze deposits, and the rumored collapse of fund Three Arrows Capital, which sent crypto prices down in the double digits over the past seven days. Celsius worked with many DeFi apps to earn high returns. About 30% of all stEth stuck on Aave, for example, is from Celsius, according to researcher Novum Insights. Three Arrows Capital, meanwhile, was an investor in Lido, which issued stETh, and is debating a change in how it’s governed.
As tracked by DeFi Llama, the total value locked in DeFi, the amount of crypto in use on apps, has plunged to $70.6 billion from $205.7 billion on May 5, just before the Terra blockchain’s implosion set off the year’s biggest crypto crisis so far.