Solend: Decentralized technology in service of centralized decision-making
This past Sunday, Solend, a self-described “algorithmic, decentralized protocol for lending and borrowing on Solana,” tried to take over a user’s account.
The Solend team rationalized that an emergency intervention was necessary because the referenced account held “…an extremely large margin position that is putting Solend protocol and its users at risk. If SOL drops to $22.30, the whale's account becomes liquidatable for up to 20% of their borrows (~$21M). It'd be difficult for the market to absorb such an impact since liquidators generally market sell on DEXes. In the worst case, Solend could end up with bad debt. This could cause chaos, putting a strain on the Solana network. Liquidators would be especially active and spamming the liquidate function, which has been known to be a factor causing Solana to go down in the past.”
The Solend team created the Solend Decentralized Autonomous Organization (DAO) to hold a governance vote, “SLND 1: Mitigate Risk From Whale,” offering its members a vote between two options:
Vote Yes: “Enact special margin requirements for large whales that represent over 20% of borrows and grant emergency power to Solend Labs to temporarily take over the whale's account so the liquidation can be executed OTC.”
Vote No: “Do nothing.”
Governance vote SLND 1 passed with ~1.15MM votes for “yes” and ~30K votes for “no.” Votes were weighted based on ownership of Solend governance tokens. One single voting wallet paid the equivalent of ~$700K to get ~90% of voting power and voted “yes.”
Critics took to social media, demanding how Solend could claim to be a player in the decentralized finance (DeFi)1 space.
Decentralized technology vs. decentralized decision-making – two distinct concepts
There are two very different usages of the term “decentralized” - decentralized technology vs. decentralized decision-making.
In the context of technology:
Decentralization often refers to peer-to-peer (P2P) networking technology, which allows all participating network entities (e.g., computers) to request and send data directly to one another without relying on a third-party entity. Blockchain technology leverages P2P technology (see my guide to blockchain technology here).
Centralization often refers to client-server networking technology, which uses a hierarchical network structure where one central computer (“server”) maintains records and other computers on the network (“client”) must make requests. The server controls access to its data.
In the context of decision-making:
Decentralization refers to organizational structures where decision-making is distributed across many groups or individuals; there is no top-to-bottom hierarchy.
Centralization refers to command and control, hierarchical organizational structures in which a minority group holds decision-making power.
Decentralized technologies are merely tools that can be used in the service of either centralized or decentralized decision-making. 2
How Solend uses decentralized technology to enable centralized decision-making
This past Sunday, the Solend team demonstrated how decentralized technology can be used to enable centralized decision-making in two instances.
Figure 1: Solend’s decentralized technology can enable centralized decision-making
1. The Solend team can decide who can do what, when, and how using its blockchain-based protocol
Blockchain technology (decentralized): Solend is a lending and borrowing protocol built on the Solana blockchain network, which leverages decentralized networking technology that allows network participants to share information peer-to-peer (i.e., without going through a third party / central authority).
Decision-making on how technology is used (centralized): The team behind Solend can code and update their protocol to decide who can lend/borrow what, when, and how, including taking over a user’s account. Protocols are foundational layers of predefined, code-based rules that govern activity among participants. Protocols can be designed to enable a few (more centralized) or many (more decentralized) to decide who can participate in peer-to-peer transactions, how, and when.
2. The Solend DAO can host governance votes where one single voting wallet determines the outcome
DAO technology (decentralized): DAOs are member-owned organizations that have rules that are built-in and enforced by code stored on blockchain technology. DAO members can vote on decisions related to how they are governed. The degree to which these governance decisions are centralized or decentralized depends on the built-in voting rules.
Decision-making on DAO governance (centralized): The Solend DAO built on the Solana blockchain network initiated a governance vote on whether or not the Solend team should take over the whale’s account. The team behind the Solend DAO decided on specific terms that practically determined the voting outcome. In the case of governance vote SLND 1, the Solend team decided on the following parameters:
Voter base: Solend DAO members who connect their wallets to vote (membership requires having a wallet that holds Solend governance tokens)
Representation: Votes are weighted based on ownership of governance tokens (one single wallet paid the equivalent of ~$700K to get ~90% of voting power)
Voting window: Voting is open for less than 8 hours
Quorum: 1% of Solend DAO membership
“Decentralized technologies are merely tools that can be used in the service of either centralized or decentralized decision-making.”
Figure 2: Governance vote SLND 1 - Top Voters
Image source: Solend DAO
Two key lessons DeFi actors can learn from the Solend event
Since passing the governance vote “SLND 1: Mitigate Risk From Whale”, the Solend DAO has hosted two additional governance votes, “SLND 2: Invalidate SLND1 and Increase Voting Time” and “SLND3: Introduce Account Borrow Limit”. At the time of writing, the Solend team has overturned its decision to take over the whale’s account, and the whale is now in contact and cooperating with the Solend team.
Regardless of how this situation ultimately unfolds, there are two key lessons DeFi actors can learn from the Solend event.
“Solend has demonstrated that it uses decentralized technology coupled with centralized decision-making.”
First, the Solend team – not the whale – developed the Solend protocol and decided on key lending/borrowing parameters, including margin requirements, borrow limits, maximum liquidation close factors, and liquidator incentives. Protocol developers can define the extent to which whale accounts can become a systemic risk and should aim to design protocols with both worst- and best-case scenarios in mind.
Second, public backlash against Solend’s purported “decentralized” lending and borrowing protocol reveals miscommunication and/or misunderstanding about how Solana uses the term “decentralized.” Solend has demonstrated that it uses decentralized technology coupled with centralized decision-making. Public criticism indicates that many believe Solend offers decentralized technology and decentralized decision-making. Companies and customers need to be clear on how the term “decentralized” is used and manage expectations accordingly.
This article was prepared by Jaymin Kim in her personal capacity. The views and opinions expressed in this article are those of the author and do not necessarily represent the views and opinions of Marsh McLennan.
About the Author: Jaymin Kim is a Director at Marsh McLennan and drives global commercial strategy with a focus on cyber and digital. In her role, Jaymin explores longer-term commercial opportunities in the areas of risk, strategy, and people.
Decentralized Finance refers to a growing financial services sector that leverages blockchain technology to enable anyone to save, lend, borrow, invest, and exchange cryptocurrencies, typically without relying on intermediaries like banks.
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