Bybit Learn
Bybit Learn
Jul 5, 2022

Solend: What It Is & How a Near Crash Almost Crippled It

For several months, Solend was quietly flying under the radar as a mid-range lending platform. However, in late June 2022, the platform suddenly started showing up on the front page of several financial news sites. 

Unfortunately, it was in the news for reasons that were certainly a cause for concern. The news left Solana users panic-stricken after it was revealed that a major crypto crash almost happened on the platform. In this article, we explore what Solend is, why the crash almost occurred, and what it means for other DeFi lending platforms.

What Is Solend?

Solend is a decentralized finance (DeFi) lending platform based on the Solana network. It lets you borrow or lend assets and uses an algorithmic protocol to determine interest rates and collateral amounts.

The Solend protocol was first launched in August of 2021. It was based on the preexisting Solana network. Solana is popular due to its speedy transactions and low fees, so adding a lending protocol to it resulted in a lot of interest. The lending platform is helpful for people who just need a standard loan, but it's also promising for investors. Because of the way it's set up, you can use Solend to leverage Solana and earn some very appealing returns.

How Does Solend Work?

Solend starts with a fairly basic premise. Users can deposit assets to their Solend account to earn interest. They can also use these deposits as collateral to take out a loan. The whole aim of the platform is to decentralize lending. 

Borrowers don’t need to take out a formal long-term loan or justify their need for a loan. Instead, the platform enables them to do short-term loans with simpler deposits and no lengthy underwriting process. Smart contracts automatically assign lending limits and collect interest.

In order to use Solend, you need to have a Solana wallet. The SOL cryptocurrency is the backbone of the Solana-based lending protocol. You can move to different denominations if you want, but Solana is the native currency for the platform. Solend has various "pools" of available crypto assets that operate with different currencies. For example, the Stable Pool lets you lend or borrow cryptos like USDC and USDT, while the Main Pool lets you work with all 20 of the crypto assets the platform currently supports.

Once you have your Solana wallet connected to the lending platform and you’ve added SOL to your account, you can begin borrowing or lending various types of crypto. The Supply option lets you look at how much interest you can earn, while the Borrow option tells you how much you can borrow with your current crypto stake.

Every loan you take will have a liquidation threshold. If crypto values alter in a way that causes your loan to cross the liquidation threshold, your assets can be liquidated. The funds then go to the lenders as collateral for the loan.

Key Features of Solend

There are a lot of other similar DeFi lending platforms, like Compound and Aave, but the Solana-based lending protocol has some special features that make it stand out.

Low Transaction Fees

Many users find Solend helpful for investing because it has low transaction fees. You can quickly borrow and sell crypto without getting hit with excessive transaction fees. Most of the platform's fees are just protocol fees you pay with each loan. These fees contribute to an insurance fund for the platform. 

Typically, the fee is set at around 10 bips, but it can vary slightly depending on which vault you use. There are also fees you pay for any Solana network transactions. The first time you interact with the network, you pay a 0.01 SOL fee. Then, for every transaction, you pay a low fee of around 0.000005 SOL. These fees are much cheaper than transaction fees on most other sites.

Increased Scalability and Connectivity

Unlike many other lending platforms, the Solana-based lending protocol prioritizes scalability. It doesn't require users to stick with one type of crypto, or conduct only low-level transactions. Users can leverage a wide range of crypto assets, with more being added to the platform regularly. You can choose from a variety of cryptocurrencies such as native coins, stablecoins and meme coins, so there’s certainly a lot of versatility.

Good User Experience

Solend might have a lot of features, but the network isn't confusing to use. One of the most impressive things about this platform is its streamlined dashboard. Well-organized and visually pleasing, it’s very intuitive to use. Most people are able to get started without requiring extensive tutorials, and there aren't confusing statistics that will cause investors to make mistakes.

Referral Program

A lot of the platform's success may be linked to its referral program, which Solend launched so that current users can get others to sign up through a referral link. The original user then gets a small financial bonus when the new user participates. Right now, the financial incentive is set to 20% of each loan's origination fee.

Risks of Using Solend

Though the platform has some great perks, it's not entirely perfect. Using it also comes with some potential problems. Before investing in any Solend strategies, there are a few things you need to be aware of.

Smart Contract Risk

The program relies on smart contracts to borrow and lend crypto assets. However, like any other type of software, these contracts can be a point of vulnerability. 

Compared to other parts of the platform, they’re more likely to face cyberattacks. The company does have rigorous audits from an independent security firm, and they have a treasury with over $20 million to compensate users who lose money due to any security error. However, there’s always a risk that hackers may identify a weak point and use it to steal or freeze funds.

Zero Tokens in Pool

Solend's lending protocol only works when users are depositing assets for others to borrow. If there are no crypto assets left in the pool, any future withdrawals or borrowing are impossible. This is called 100% utilization, and it can occasionally be an issue. 

This problem is resolved as long as users pay back their loans, or more users supply tokens to the pool. However, if a user's deposit represents a very large share within the pool, this can inhibit their ability to move funds.

Liquidation Risk

Each loan that the platform offers must be backed by collateral that’s worth more than the loan itself. However, collateral value is constantly shifting. If your collateral's value drops, asset LTVs may determine that your loan is below the threshold. At this point, you can either add more collateral or let your existing collateral be liquidated. However, liquidating your position incurs a penalty. If you aren't paying close attention to your loans and investments, there's a chance you could end up accidentally losing your loan — and having to pay the liquidation costs.

Failure of Loan Payments

People who lend on the platform may potentially run into issues where their loans aren’t covered. This can happen during large-scale liquidations or periods of market turmoil. When a lot of assets are liquidated at once, their worth may not be enough to cover the loans of the user. This results in a negative balance that can harm the lender. 

Typically, the platform tries to keep this from happening by putting deposit limits on riskier tokens. They also use the insurance fund to top up any negative balances. However, this insurance fund is generated by transaction fees, so it isn’t limitless.

The Near Crash of Solend

Many of these potential issues with Solend recently came to a head. In late June 2022, the lending platform was all over the news because of an impending crash.

What Happened

One of Solend's key vulnerabilities is that users join together to create a lending pool. This can lead to problems when a single borrower, called a "whale," has an outsized presence within the Solana-based lending protocol. In the June crash, there was a whale borrower who had an outstanding loan of $108 million worth of USDC and USDT. The borrower's stablecoin loan was backed by $170 million worth of SOL in their Solana wallet.

The whale's loan was the largest single-user loan on Solend, so it took up a huge portion of the lending pool. This was fine as long as SOL prices were high. However, when SOL prices started tanking around June 15, this huge loan became a problem. SOL prices were dropping to $27, so the whale's loan was quickly approaching its liquidating threshold.

Solend’s Developers Tried Notifying Whale

When Solend's developers noticed this issue, their first plan was to notify the lender of the impending liquidation. At this point, another one of the platform's vulnerabilities became apparent. Solend is entirely anonymous, so there’s no way to contact a user outside of sending a message to their account. Unfortunately for the developers, the whale wasn't checking their own account.

If SOL's price were to reach $22.30 without the whale doing anything, their collateral would've been liquidated. This would have resulted in over $21 million of SOL being dumped at once. Users feared a serious amount of fallout for the market. Though SOL is a fairly robust blockchain, with a market cap of around $11 billion, such a huge sale would have caused its value to tank even further.

It became a race against time, with the group desperately trying to notify the lender before the liquidation went into place. After private methods of contact failed, they turned to the internet. The developers posted on Reddit and Twitter, begging the borrower to contact them. They even sent an on-chain transaction with a memo, asking the whale to talk to them about the issue. Of course, making the issue public caused further problems. Users were spooked, and started pulling their funds, resulting in fewer tokens in the pool and more funds being frozen.

Eventually, Solend was able to use an intermediary to contact the whale and get them to add more collateral to their account. However, before this took place, the platform had been seeking other solutions. They ended up enacting their first decentralized autonomous organization (DAO) vote. This essentially required users to join together and vote on proposed solutions to the problem, as described below.

Proposal 1: SLND1 — Mitigate Risk From Whale

Solend's first proposed measure was an "emergency powers" package. This proposed suggestion, named SLND1, would have given the developers more control over users' accounts, allowing the platform to identify whales who represent more than 20% of the borrowing in any given pool. Solend would then have emergency power to take over these accounts in the event of any liquidation. The platform would be able to liquidate the account more slowly, so that lenders would get paid but SOL shares wouldn’t get dumped en masse.

At the time, this proposal was met with a lot of favor. Solend got just enough voting participation to meet their 1% quorum requirement, and the emergency ballot passed by 97.5%. 

However, users quickly found out that there were some unsavory dealings going on behind the scenes. The platform was struggling to achieve enough user participation to reach a quorum, so they found a user who owned over 1% of all the turnout tokens. This user with an outsized amount of votes swayed the results of the election, and many members of the community were outspoken about how much they disliked the measure. They felt that it gave the platform too much control over individual users accounts.

Proposal 2: SLND2 — Invalidate SLND1 & Increase Voting Time

Since there was so much public outcry over SLND1, the developers proposed a new measure, SLND2, that would essentially reverse everything agreed upon in SLND1. The new measure proposed both to cancel the idea of giving the Solend team more power over user accounts, and increase the overall voting time.

This ballot ran into a similar problem as the first proposal. Once again, users were divided, and it mostly came down to the input of the same user with an outsized amount of voting power. This user initially said they would vote "No" on SLND2 because they didn't want to cave to public pressure. However, at the last minute, they decided to vote "Yes” and the proposal passed. The platform was no longer allowed to access user accounts in an emergency, and users were given more time on future votes.

Proposal 3: SLND3 — Introduce Account Borrowing Limit

After the first two controversial votes, Solend users were becoming fairly anxious. Fortunately, the platform was able to finally get in contact with the whale and work to resolve the current situation. While this was happening, the team also began to work on a new proposal that would hopefully reduce the risks of this happening again.

SLND3 was a ballot measure that proposed to reduce borrowing limits for all users. The proposal suggested that, in the future, there should be a borrower ceiling of $50 million. This would hopefully prevent one borrower from being able to take up so many funds from a lending pool. The ballot passed on June 21, and the proposed limit went into effect. Though there was once again the issue of a single user deciding the vote, there was less public outcry because most people believed the new measure was a wise decision.

Overall Impact on SOL

It's hard to clearly define Solend's effect on SOL, since the two are so closely related. SOL was definitely on the downturn before the lending protocol disaster. In fact, the Solana network crash was the main reason that all of the whale's SOL collateral was almost liquidated in the first place. 

During the days of constant, contradictory proposals, market uncertainty continued to drive SOL prices down. Many investors dumped their SOL for fear the value was about to drop further.

However, once the whale helped resolve the near-crash in late June, SOL didn't immediately recover. Prices have returned to the early June levels of around $32, but they aren't back to the highs the coin was at in April of 2022. It looks like stabilizing Solend prevented a bigger crash, but it hasn't reversed the Solana network's mid-2022 slump.

Is Solend a Good Investment?

The situation with Solend highlighted a lot of key problems with the program. Many investors are now wary of lending to users, because the whale issue highlighted just how easily one bad call could destabilize any lending pool. It’s somewhat reassuring to see that the developers were able to handle things, and keep users from losing money. However, if there’s a reoccurrence, the outcome may be very different. Despite the newer borrowing limits, there still isn't much regulation in place to prevent the same problem from happening again.

That being said, there's no indication that borrowing on the platform or using it to leverage cryptos against each other is potentially disastrous. These sorts of activities don't necessarily run the same risk of drastic harm from a single large liquidation. However, the June crash did cause a limited lending pool. This could be a problem for investors whose plans involve acting quickly, and constantly taking out various loans.

In addition to the practical issue of one whale borrower bringing things to a halt, the June crash also introduced some more philosophical problems. Many investors were drawn to the lending protocol because it claimed to be a DeFi program in which financial decisions weren't based on human error. 

However, all of the SLND proposals ended up coming down to a single user whose votes were heavily influenced by both the developer team and the Twitter outrage. The ability of one voter to purchase so much power shows that Solend may end up being influenced by personal bias and real-world politics — just as much as the traditional financial system it criticizes.

The Bottom Line

Ultimately, Solend might have some exciting features, but the near-crash shows the dangers of DeFi lending platforms. Despite claims that the program is decentralized and algorithmic, it ends up relying entirely on user behavior. And, since it's lacking in regulations, this opens up a lot of vulnerabilities that can cause real financial damage. The lending protocol is certainly interesting to tinker around with, but we'd recommend caution when working with large sums.