Solend is a decentralized application that allows users to borrow or lend crypto funds. Just like with TradFi, lenders earn interest on their deposits from borrowers.
However, Solend has been criticized for falling short of the spirit of DeFi. And the total locked value of the project crashed in November 2022 after the collapse of the FTX exchange.
How does Solend work?
Solend is a classically designed decentralized application (dApp) for lending, except that it is based on Solana instead of the Ethereum blockchain. Given that Solana is much faster and cheaper to use than Ethereum, this made Solend very popular.
Solend launched its SLND utility token in November 2021.
Solend’s token has fallen during the bear market. Source: DeFi Llama
Before we examine how Solend’s TVL skyrocketed only to collapse a year later, let’s look at how the dApp works.
As with other dApps in the decentralized blockchain space, Solend’s purpose is to change the lending process. And that is only possible if the users themselves become online mini-banks. Specifically, they become liquidity providers: .
- Users connect with Solend dApp to Solana’s native wallet, like Phantom.
- Users then choose to lend or borrow money, primarily in stablecoins or SOL, Solana’s native cryptocurrency, which is equivalent to Ethereum’s ETH.
- When users want to become lenders, they deposit funds into liquidity pools, thus becoming liquidity providers.
- When users wish to become borrowers, they post collateral and access pools of liquidity provided by lenders and receive interest in return for their liquidity-providing service.
Of course, since it is decentralized funding, the whole process is automated. Liquidity pools are smart contracts that regulate the conditions under which interest (APR) is generated and when the borrower’s collateral is liquidated.
Solend has different liquidity pools. Typically, Solend’s stable pool, which consists only of stablecoins, is used for borrowers who need high loan-to-value (LTV) ratios. For example, to lend $950, one would need to deposit $1,000 worth of USDC stablecoin since the LTV ratio is 95%.
In all DeFi, stablecoins are useful because they are pegged to the value of the US dollar. This minimizes volatility, which is important to avoid liquidating loan collateral.
Eventually, Terra collapsed when its UST stablecoin collateral was decoupled from the dollar, sparking a cascade of liquidations.
Solend’s main pool has the highest TVL of any Solend liquidity pool and offers a dozen digital assets ranging from SOL and SLND to staked SOL like mSOL and stSOL.
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For example, mSOL is used in Solana’s Marinade.Finance protocol, where users deploy SOL to provide liquidity without custody in their DAO. In return, they receive mSOL of the same value as SOL.
This concept of locking an asset but getting a derivative asset in return is rampant in DeFi, so locked deposits don’t prevent people from using DeFi services.
In the same way, people use Lido.Finance to stake ETH but receive stETH in return. Finally, Solend uses two types of fees:
- Interest rate spread as a percentage of the borrowing rate that Solend receives as log income.
- Liquidation insurance fee as a percentage of the liquidation penalty, set at 30%, with funds going to Solend’s DAO coffers.
Considering that Solend’s success relies on good leverage, these liquidation fees encourage users not to overextend themselves.
SLND tokenomics
Solends SLND is the protocol’s governance and utility token. Solend users can use their SLND tokens for liquidity mining, which means depositing tokens into liquidity pools for borrowers to lend from them. In return, SLND depositors receive rewards.
Solend was funded with SLND token sales in November 2021 via a crowdfunding method called IDO – (Initial DEX Offering) after raising $26.27 million at an initial SLND price of $6.57.
The total supply of SLND tokens is 100M, with 60% allocated to the community.
Of that 60%, 30% goes into liquidity mining, with the other half going into Solend’s DAO treasury. SLND was first listed on the now-defunct FTX exchange alongside Gate.io and MEXC.
In June 2022, Solend acquired Nope Finance using its NOPE tokens. These assets can be converted on the Serum DEX by following this conversion guide.
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As a governance token, SLND tokens provide users with voting rights proportional to the number of tokens held. Unfortunately, this created unique controversies across the board, which are detailed below.
Interestingly, this is not the only controversy. Solend founder Rooter accused Alameda Research of rigging the protocol’s IDO launch by withdrawing $80 million at the last minute.
Solends risks and controversies
Like other lending dApps, Solend uses Oracle networks to feed smart contracts with spot prices of digital assets. This is how smart contracts monitor liquidation thresholds for loan collateral. While Ethereum uses an oracle network like Chainlink for this purpose, Solana Blockchain uses Pyth Network and Switchboard (backup).
Users should note that Jump owns Pyth, but Jump also faced the collapse of FTX. Accordingly, it appears that the Pyth oracle network can be manipulated, for better or for worse.
Therein lies Solend’s vulnerability, as it is possible for oracle networks to report false prices that result in erroneous liquidations or prevent liquidations. In addition, DeFi dApps are vulnerable to smart contract hacks.
In November 2022, Solend suffered $1.26 million in damage in a single day as a result of an oracle exploit involving three of Solend’s liquidity pools.
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Outside of smart contract exploits, there is also the possibility of community voting outside of the expected DeFi norm. Case in point: In June 2022, when a whale’s $21 million account was in danger of being liquidated, Solend token holders voted to take over the $216 million account.
Such a bad debt threatened the liquidity of the entire protocol. Solend would then sell the whale’s assets over-the-counter (OTC) to cover the bad debt.
However, since this move went against everything DeFi stood for, there was a second vote that invalidated the first proposal. The founder of Solend, who goes by the nickname Rooter, revealed what was going on behind the scenes in this interview.
Solana’s FTX exposure
Following FTX’s collapse in November 2022, Solana suffered a major blow due to his close ties to Sam Bankman-Fried’s businesses. Alameda Research, the crypto hedge fund controlled by Bankman-Fried, held 13.25% of all SOL tokens in circulation.
This posed a liability issue for the entire Solana ecosystem, as bankruptcy trustees could trigger a violent sell-off that would depress all prices and trigger Solend’s liquidation.
Due to Bankman-Fried’s stake in Solana’s decentralized exchange Serum (SRM), often used alongside Solend, SOL was down 55% and SRM down 65% in November 2022. Likewise, Solend (SLND) token fell by 48% over the same period.
It remains to be seen if Solana, along with Solend, will recover from these unprecedented disruptions.
Disclaimer for the series:
This series article is for general guidance and information only for beginners participating in cryptocurrencies and DeFi. Nothing in this article should be construed as legal, business, investment or tax advice. Consult your advisors for all legal, business, investment and tax implications and advice. The Defiant is not liable for lost funds. Please use your best judgment and exercise due diligence before interacting with Smart Contracts.
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