Lending app tries to take over ‘whale’ a/c to halt crypto collapse

The record-setting rout in cryptocurrencies has put a slew of decentralised-finance (DeFi) applications and their communities in a race to protect themselves against a cascade of liquidations — sometimes by employing unprecedented measures.

On Sunday, token holders of Solend, a lending app on the Solana blockchain, voted to temporarily take over a so-called “whale” investor that it said could significantly influence market movements, an extreme move for DeFi that appears to be a first. That decision was reversed in a second vote on Monday.

That all took place after MakerDAO, an app that supports stablecoin DAI and is run by a crypto community that formed one of the first decentralised autonomous organisations, suspended the token from being deposited and minted in DeFi crypto lending platform Aave.

The cryptocurrency industry was on edge on Monday as Bitcoin struggled to stay above a key level, with investors fearing that problems at major crypto players could unleash a wider market shakeout.

Bitcoin, the world’s biggest cryptocurrency, was trading just under the symbolic level of $20,000 in early London trading hours —roughly the peak of its charge to its previous record in 2017.

Bitcoin had dropped on Saturday to as low as $17,592.78, falling below $20,000 for the first time since December 2020. It has lost almost 60 per cent of its value this year and 37 this month alone in the cryptocurrency sector’s latest meltdown.

Further declines, market players said, could have a knock-on effect as other crypto investors are forced to sell their holdings to meet margin calls and cover losses.

Its fall follows problems at several major industry players.

DeFi apps — in which users can trade, borrow from and lend to each other without intermediaries like banks — are suffering because they tend to be interconnected, and troubles in one can have cascading effects on others. Users often put up tokens as collateral to borrow a coin in one app, to be deposited to get higher yields into another. When crypto prices tank as has happened recently, that can trigger margin calls on collateral, and users that don’t address this by adding more collateral get liquidated in a process triggered by software and executed by bots designed for this purpose.

When a user is ready to be liquidated, these bots — run by third-party programmers and traders — jockey to liquidate the positions so they can earn a bonus for doing so, a common practice in DeFi. As many bots compete to liquidate a position, that can clog a blockchain with transactions. Meanwhile, a dump of a slew of coins by liquidators

can also further pressure token prices, prompting another cascade of liquidations. By stepping in, DeFi communities are trying to avoid all of this.

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 favour 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.

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 have attempted to liquidate the position in such a way that the liquidated tokens’ price was less affected, through an over-the-counter sale with a specific buyer. It’s assumed the owner of the account would have benefited 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. Following the criticism, a second vote that concluded on Monday resulted in reversing the account seizure plan.

Solend will “work on a new proposal that does not involve emergency powers to take over an account,” it said in a post announcing the vote.

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