The impossible is about to occur in crypto...
An unprecedented dark event can change crypto forever...
Yesterday, one of the most infamous events in the history of crypto and blockchain happened. To the disbelief of many, including myself, Solend, a DeFi lending protocol on the Solana blockchain, put to a vote something absolutely unprecedented:
Take over the assets from a whale’s account to liquidate them in a way that the liquidation doesn’t create a severe drop in price that in turn generates a cascade of liquidations in the protocol.
Yes, you read it right. They actually intended to (and probably eventually will) rob someone of their own money to save the protocol.
What actually happened
A massive whale borrowed against their Solana holdings through a Solana DeFi protocol that goes by the name of Solend. The issue at hand is that the trade is about to be liquidated, and the value of the liquidation is so big, that there is actually a huge risk that the liquidation could drop the value of SOL so much that it could create a cascade of liquidations that could eventually drop SOL’s value to zero. But, what is a trade liquidation?
For leveraged positions, which are trades that are executed with debt, these trades are set with a margin requirement. If the value of the underlying asset drops below that margin requirement — i.e. they don’t have sufficient funds to keep the trade open, the asset is automatically transformed into cash, and the trader absorbs the total loss of the decreased value of the asset. In the case of the article, such a huge amount of SOL being converted into cash (sold onto the market) would create huge selling pressure on the coin and drop its value significantly.
So what are the people at Solend trying to do? They want to intervene the whale’s account, get control of the position and liquidate it in a way that evades the possibility of creating the liquidation cascade. Just imagine what people in Argentina in 2001 with the ‘corralito’ or the poor Venezuelan people that got their savings taken over by the corrupt government might have thought. For things like these crypto and the blockchain were created, and now we are seeing this absolutely horrifying event about to occur in that very space that was born to battle these events.
However, there’s more. In order to do this, the Solend team put to a vote this intervention, therefore letting the “community decide” — disclaimer: they shouldn’t have the right to vote on this calamity in the first place. Unsurprisingly, the vote was a sham, as the voting system was down for a long period of time, and a single wallet from an unidentified whale, just one wallet, accounted for 98% of the yes votes.
Today, a second vote was created to invalidate the first one and give a whole day to make the decision, as fury spread across the crypto space. The corruption was too much to handle I guess.
These things aren’t meant to happen in crypto
No matter what eventually happens, the damage has been done. Even though I have a deep distaste for Solana, a project that I feel is a glorified centralized database, proven by the continuous and embarrassing outages that completely discard it as a viable blockchain on which to build — if we can consider it a blockchain at this point. However, the nature of the problem here is independent of it being in the Solana blockchain.
The reason for this is that what they are about to do is rewrite the smart contract so that they can intervene the whale’s account. In other words, change the rules of the game after it has started. Besides the dubious ethicality of trades like this (I would never make a leveraged trade myself), this is just plain wrong, for uncountable reasons. For instance:
Who is going to trust decentralized protocols, or DeFi as a whole, based solely on smart contracts, if there is fear that they might change the rules of the game during playtime? The whole point of smart contracts is that, by being in a blockchain, they will remain unchanged and will execute according to the rules agreed before a trade is carried out.
This situation, which would be certainly illegal outside the space, will just simply prevent widespread adoption. Nobody wants to be scammed, especially non-tech people who don’t understand the technology. If society doesn’t see decentralized finance as something trustworthy, why would they believe in it in the first place?
It is simply wrong. In a fair and free world, it is your decision how you earn, spend and trade your hard-earned money, anything outside of that is outright communism.
If this could happen, you should have avoided this situation and prevented whales (and ordinary people) from making incredibly leveraged trades. If you as a protocol team are prepared to enable those types of trades that more often than not benefit you, as they incentivize usage of your chain, you have to be prepared for situations like these. This “the casino always wins” approach is just the worst of TradFi brought into crypto.
What should be done to prevent these situations?
I understand that some sort of smart contracts are meant to be updated. if not, DAOs (decentralized autonomous organizations, an acronym for decentralized governments that rule certain crypto projects) aren’t possible. However, in order to avoid DAOs becoming scammy and corrupt centralized rule makers, certain action has to be taken.
For instance, as Charles Hopkinson, founder of Cardano proposed, there should be two types of smart contracts; those that can be updated, for governance purposes for example, and those to can’t (situations like the one we are talking about today).
We people of the crypto space have a big role to play and work together to build a decentralized world that prevents situations like these; we can’t allow ourselves to become part of the problem.
HT: https://medium.datadriveninvestor.com/the-impossible-is-about-to-occur-in-crypto-e1f8b6234222
