When DAO governance goes wrong • Benzinga Crypto


During extreme market downturns like the ones we have experienced over the past 3 months, inefficiencies are often uncovered. We’ve seen over-leveraged giants like Terra, 3AC and Celsius fall, but the damage didn’t stop there. One of the most interesting stories amidst the carnage is the decision of Solend (an algorithmic, decentralized lending and borrowing protocol on Solana) to create a DAO and forcibly take over the account of their largest whale threatened with liquidation. . Was this decision a necessary evil to save the protocol or is this a case of DAO governance going wrong?

What happened

A whale on the Solana network deposited 5.7 million from Solana to Solend to then borrow 108 million USDC and USDT. As the market continued to slide over the weekend, the liquidation price of this whale of $22.30 was within reach with SOL trading at a low of $25.83. If the liquidation price was reached, 20% of their borrowed funds would be liquidated and sold in the market on DEXs, which could result in Solend acquiring bad debt, a cascading drop in Solana’s price or even the total shutdown of the Solana network due to liquidators spamming the network. . Ultimately, the liquidation of this position would not only mean chaos for Solend, but also the entire Solana network. With this in mind, the Solend team felt they had no choice but to act quickly to try to lessen the damage of this possible liquidation.

DAO governance offers a solution

On June 19, Solend, which had no DAO before, hastily created one and put forward its first proposal. In this proposal, they described what was happening with this risky position and the problems it caused. The proposed solution had two main points seen below.

“Enact special margin requirements for large whales which account for more than 20% of borrowings. If a user’s borrowings amount to more than 20% of all borrowings for the main pool, a special liquidation threshold of 35% is required. This policy will come into effect upon approval of the proposal.

Grant emergency power to Solend Labs to temporarily take over the whale account so the liquidation can be executed over-the-counter and avoid pushing Solana to her limits. This would be done via a smart contract upgrade. Emergency powers will be revoked once the whale count reaches a safe level.

Essentially, the proposal is to take over the account from the whale and execute the OTC liquidation to avoid liquidity or network issues. As you’ll see below, the proposal passed with the vast majority of users voting yes. While this may have been in good faith from Solend’s perspective, it absolutely undermines any trust a user might have had with the protocol. If at any time the team can vote to take control of a user’s funds, is this really true to the philosophy of DeFi?

This brutal creation of a DAO and the subsequent vote to take over this whale’s account caused a crypto Twitter frenzy. Like wildfire, the crypto Twitter crowd was assembled and Solend was in the crosshairs. Below is one of many tweets from space figures disparaging Solend Labs’ governance decision.

Tweet on Solend DAO's $100 million proposal

With such community uproar, early Monday morning, Solend’s second proposal was put forward, titled “Disable SLND1 and Increase Voting Time.” Citing the recent rebound from the lows which bought the team more time, Solend invalidated his first proposal stating that they will use this temporary reprieve to write another plan in the future. Although Solend never took control of the whale’s wallet, the intention was there and it’s safe to say that Solend’s integrity will forever be in question going forward.

What does this tell us about DeFi?

There are a few key takeaways from this Solend situation. The first is that on-chain governance is clearly still a huge issue within DeFi. Participation in governance is generally extremely low and leads to a few whales dictating the future of these protocols. Even in this example, a minority of the total votes made a decision on behalf of a $100 million+ whale. Moreover, this situation also highlights the stark differences between DeFi on Ethereum and any other layer one network. For comparison, Ethereum currently sits with over $40 billion in DeFi and $4.6 billion in the largest decentralized exchange. A single DeFi protocol on Ethereum has more liquidity than all of Solana DeFi! With the most liquidity in a long time and the longest history of success, it really begs the question of why anyone would use any layer other than Ethereum for DeFi applications.

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What is Solend?

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BlockStar Advisors

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Solend is a popular lending and borrowing protocol on the Solana blockchain. Users can deposit cryptocurrencies to earn interest and borrow.

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What is a DAO?

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BlockStar Advisors

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A DAO is a decentralized autonomous organization and is the primary structure for popular protocols to govern themselves. Most often, users can propose and vote on protocol changes with their voting power depending on how many native tokens the user has.

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What does it mean to be liquidated in DeFi?

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What does it mean to be liquidated in DeFi?

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BlockStar Advisors

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DeFi protocols have margin requirements built into their smart contracts. When the value of what a user borrows exceeds the protocol’s margin requirements, the user’s deposits may be sold on the open market to maintain the protocol’s solvency.

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A full version of this article can be found here (https://blockstar.substack.com/p/the-power-of-the-mob).

Blockstar Advisors is a full-service Web3 advisory firm focused on blockchain education. To learn more about us and what we offer, visit blockstaradvisors.com or check out our Twitter @blockstar_adv.

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