Solend Imposes Account Borrow Limit, Underscoring Challenge of DAO Governance

Solend, Solana-based decentralized lending and borrowing protocol, passed its third governance proposal, one which limits users’ borrowing on the platform to $50 million per account, with rollout starting at $120 million and gradually decreasing, the company said in a blog post this week. 

Any debt above the limit will be eligible for liquidation, regardless of collateral value, according to Solend. 

This move comes as the company has been grappling with how to protect itself against a brewing liquidation crisis. The Solana DeFi platform’s DAO (decentralized autonomous organization) members attempted to decide whether to take over a “whale account” — a wallet holding “an extremely large margin position” that was close to liquidation. Initially, they voted to do so, but following community backlash, a second vote on Monday reversed its initial take-over. 

Even so, the Solend team maintains that the whale account is “continuing to impose a heavy strain on Solend users,” and so it introduced its third proposal — a compromise which will temporarily reduce the maximum liquidation close factor from 20% to 1%. The new plan “caps the amount that can be liquidated in a single transaction.” 

The protocol will also temporarily reduce the liquidation penalty for SOL from 5% to 2%. “This should reduce liquidator spam while still being enough of a bonus for liquidators to break even on slippage,” the proposal read, eventually getting 99.7% of votes that green-lighted this authorization. 

“Solend is reaching out to market makers to help provide better on-chain liquidity. This combined with our proposals should reduce DEX market impact to a manageable level,” the proposal stated. 

Early Thursday, Solend observed that the whale borrower had continued to reduce their position on the platform, paying down a further $3 million of debt after lowering their USDC debt position by $25 million on Tuesday and $11.5 million on Wednesday, actions which further reduce the protocol’s risk. 

The SOL token price has also seen a steady climb, changing hands for at $38.55 as of 4:30 am ET Friday. 

Yet, many questions surrounding Solend still remain, including liquidation and the mechanism of DAOs voting. 

“We think that decreasing the limit is not the best solution in bear market, people should wisely take the loans in every amount, but also thinking about liquidation risks,” Shirly Valge, COO of blockchain company Velas, told Blockworks. 

“We think LTV (loan to value) is the key. Decreasing LTV will not put vaults in liquidation risks and people will use such instruments more wisely,” she added. 

Solend DAO and problems of decentralized governance

Earlier this week, Solend’s second proposal received 1,480,264 “yes” votes and 3,535 “no” votes with a majority of 99.8%. One wallet made up 90% of votes. Critics pounced that the protocol can hardly be said to be decentralized.

Solend told Blockworks that the voting whale user bought all their SLND from secondary markets a few months ago and didn’t buy it for the purpose of voting on a specific proposal. 

“Their [Users’] trading history is on chain, and we can help pull those transactions if needed,” they added,” it added. 

The team acknowledged that its new approach is not perfect — for instance, “a user could split their account up to circumvent the per-account borrow limit.” But they suggest that such shortcomings can be addressed later.

According to Solend, it wouldn’t be an issue “if there was enough liquidity or if liquidations were improved to be able to handle them in an OTC-like way (i.e. auction or request for quote rather than market sell). We’re exploring this.”

Still, the example of Solend’s governance proposal has put forward the greater question of how decentralized these so-called DAOs really are, as well as the practical limitations of dealing with meatspace contract law. 

Last week, Merit Circle and seed investors Yield Guild Games (YGG) crashed into a legal dispute after Merit Circle DAO members voted to refund YGG’s initial investment — a move that would represent a blatant contractual breach with the Gibraltar corporation Merit Circle Limited, which initially made the deal. 

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Crypto-specialist attorney Grant Gulovsen, said in an interview with Protos that “a DAO voting to retroactively change the terms of a contract typically won’t have any legal effect on the terms or the enforceability of the original contract terms unless the original contract explicitly allowed for that to happen.” 

The team managed to renegotiate the contract terms with YGG, which the DAO also approved, effectively reaching a compromise that avoided a legal crisis.

But both examples, Solend and Merit Circle, highlight unresolved questions about who’re really in charge of these projects; is it the teams doing the work, or the masses voting their tokens off-chain?

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