What Actually Happened

A major whale had borrowed against their Solana assets using the Solend platform. The concern arose because the impending liquidation was substantial enough that it posed a real threat of collapsing the value of SOL, potentially leading to a domino effect of further sell-offs that could drive SOL's price down to nothing. But what does liquidation mean in this context?

When dealing with leveraged trades—transactions executed with borrowed funds—there are margin requirements that must be met. If the asset's value dips below this threshold, the asset is liquidated, converting it into cash and leaving the trader with the loss from the devaluation. In this case, a significant amount of SOL being sold could create immense downward pressure on its price.

So, what was Solend's strategy? They aimed to intervene in the whale’s holdings, manage the liquidation process, and prevent a catastrophic market reaction. It's akin to the distressing economic situations faced by people in Argentina during the 2001 financial crisis or the Venezuelans whose savings were usurped by an untrustworthy government. This is exactly the kind of scenario that cryptocurrencies and blockchain technology were designed to circumvent, making this situation all the more alarming.

Moreover, Solend’s team put this intervention to a vote, ostensibly letting the “community decide”—though one might argue they shouldn’t have been permitted to vote on such a dire matter. Predictably, the voting process was flawed, with the system experiencing downtime, and a single unidentified wallet cast 98% of the affirmative votes.

In response to the outrage within the crypto community, a second vote was initiated to annul the first, allowing a full day for deliberation as anger rippled through the space. Clearly, the level of corruption was overwhelming.

The Unacceptable Reality in Crypto

Regardless of the outcome, the damage is already done. Despite my personal reservations about Solana—viewing it as little more than a centralized database, evidenced by its frequent and embarrassing outages—the core issue transcends the Solana blockchain itself.

What’s at stake here is the potential revision of the smart contract to facilitate intervention in the whale’s account. In essence, they are attempting to change the rules mid-game. Beyond the questionable ethics of such trades (which I personally would never engage in), this approach is fundamentally flawed for numerous reasons. For instance:

How can anyone trust decentralized platforms or DeFi as a whole, which rely on smart contracts, if there is a possibility that the rules can be altered during execution? The very purpose of smart contracts is to remain immutable on the blockchain, executing precisely as agreed before any trade takes place.

This kind of behavior, which would be deemed illegal in traditional financial systems, poses a significant barrier to widespread adoption. No one wants to be deceived, especially those who may not be technologically savvy. If society does not view decentralized finance as trustworthy, what incentive do they have to engage with it in the first place?

It is simply unacceptable. In a just and free society, individuals should have autonomy over how they earn, spend, and trade their hard-earned resources; any deviation from this principle is akin to communism.

If such scenarios are possible, then protocols should have implemented measures to prevent both whales and everyday investors from engaging in excessively leveraged trades. If you, as a protocol team, are willing to facilitate such trades, which often serve your interests by increasing platform usage, you must also be prepared for the consequences. This “the house always wins” mentality is merely a replication of the worst aspects of traditional finance.

What Can Be Done to Mitigate Future Risks?

While I acknowledge that some smart contracts are intended to be updatable—otherwise, decentralized autonomous organizations (DAOs) would not function—certain precautions are necessary to prevent DAOs from becoming corrupt centralized entities.

For example, as proposed by Charles Hopkinson, the founder of Cardano, there could be two categories of smart contracts: those that can be modified for governance purposes, and those that are immutable, applicable in situations like this one.

As participants in the cryptocurrency ecosystem, we have a collective responsibility to collaborate in creating a decentralized world that avoids such crises; we cannot afford to be part of the problem.

Final Thoughts

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