Risky debt spills over into Solana’s DeFi ecosystem as the drama around a whale and Solend shifts to a new phase.
Solend, the main lending protocol on Solana, has agreed with rival Mango Markets to share the debts of its largest user – an unidentified whale holding $207.3 million of SOL, according to governance proposals.
Threat to Protocol
The sum represented a quarter of the total value locked (TVL) of Solend and posed a threat to the protocol. On June 22, the whale paid $11.5M debt, according to Solend. It is unclear exactly how much has been refunded in recent days.
“This shows commitment to problem solving and solves the USDC usage problem of Solend… We are in contact with the Mango team and [the whale] to develop a long-term plan”, Solend job.
“That doesn’t completely solve the problem though, since the great liquidation wall still exists,” the team added, meaning that a large portion of the position can still be margin called.
Mango’s decision to save Solend did not come without criticism from his community. Daffy Durairaj, co-founder of Mango, posted a summary of the plan and the risks it could pose on the protocol community forum.
“Most of you are probably aware that there is a borrower with 6 million SOL collateral looking to borrow over 150 million stablecoins,” the post said. “He had his whole position on Solend, but recently started moving some of it into Mango and other protocols. We will have additional risks if the borrower deposits their collateral in Mango and max borrows USDC.
On June 19, the Solend team warned that action needed to be taken to address the risks associated with the account of its largest whale, which had taken out USDC and USDT loans worth $108 million. dollars against 5.7 million SOL tokens. Solend estimated that the account accounted for 95% of SOL deposits, 88% of USDC borrowings, and a quarter of the dApp’s TVL.
The team said that a further 20% decline in SOL’s price to $22.30 would cause the position to begin liquidating, but position size could have such a big impact on prices that Solend could end up with a bad debt.
Solend said he had tried unsuccessfully to contact the whale since June 13 via on-chain messaging and public Twitter posts.
SOL has since rebounded along with the broader crypto markets, jumping nearly 3% in the past 24 hours as of midday UK time, according to CoinGecko.
The news comes as stress over DeFi lending escalates. Celsius and Three Arrows Capital’s struggles to manage loan obligations became a crisis amid the bear market.
A June 19 proposal from Solend to take control of the whale account was quickly passed by governance before being scrapped after the team came under heavy criticism from decentralization supporters. A new plan to introduce debt ceilings leading to a gradual liquidation of loans above $50 million was adopted on June 21.
It appeared that the whale was changing assets. That same day, Solend tweeted that USDC usage had started to drop from 100%, allowing users to remove the stablecoin from the protocol again.
Solend’s team said the whale began to expand the position on other lending platforms after $25 million of USDC debt was transferred to Solana’s Mango Markets.
Durairaj said the whale is looking to borrow $150 million in stablecoins, saying the protocol could increase its maximum annual interest rate from 150% to 300% if the whale uses 100% USDC in the protocol.
He noted the risk that the whale position could be too large to liquidate without suffering serious slippages in the event of significant price declines for SOL, meaning the protocol could end up with insufficient collateral to repay debt in crash case.
Such an event could threaten to deplete Mango’s USDC 10 million insurance fund and possibly lead to socialized losses for USDC depositors, although Durairaj said the $60 million in assets of Cash from Mango DAO could also be used to repay losses or provide a liquidity buffer.
Twitter User Fat_Crypto_Losr replied that Mango should limit the amount of stablecoins available to the whale. “I care what happens to Mango, I care what happens to Sol. If we’re not ready for this level of action, don’t take it,” they tweeted.
Durairaj replied these limits will be introduced alongside the v4 iteration of mango and Mango should use its upgrade advice sparingly in the meantime. “People should withdraw their deposits from Mango if they think the risks are too high,” the co-founder added.
like a circus
Many members of the Solend community remain unhappy with the situation despite Mango mitigating some of the risk by taking part of the whale’s position.
Soften said “yeah they listened to you[r] suggestion basically at gunpoint. Don’t spin this as if it’s optional, and they choose to do so. This whole fiasco makes protocol look like a circus.
RedCryptoPanda tweeted “I’m always [in] Awe you could actually step in and take control of the funds. Just stunning. It shouldn’t even be possible.
The incident dethroned Solend as the largest DeFi protocol from Solana by TVL. The dApp is now Solana’s third-largest at $243.6 million after a 58% 30-day drop and 32% drop last week — the weakest performance among Solana’s top 25 protocols, according to DeFi Llama .
Serum, a decentralized exchange, is now Solana’s largest dApp with $293.6 million, followed by liquid staking protocol Marinade Finance with $254.5 million.
Solend and Mango Markets did not respond to requests for comment.