The continued rout in cryptocurrencies has rushed many decentralized finance platforms and their communities to take protection against the massive liquidations, often resorting to taking unprecedented measures.
According to Bloomberg News, a lending app on the Solend blockchain, Solend saw its token holders voting to take control of a large user account facing a large-scale liquidation threat. This was an extreme move for DeFi and the first of its kind.
MakerDAO is a crypto community-run app that supports Stablecoin DAI. It was formed to run the first autonomous decentralized organization that got token suspended a day earlier from being deposited and minted in AAve, a DeFi lending platform for cryptos.
Users can trade, lend or borrow from each other in Defi apps without the intervention of any intermediaries like banks; they are suffering as they are all interconnected, and trouble in any of the DeFi apps can have a cascading effect on others. Users usually borrow coins in the app and deposit them in another app where the yield is higher and provides tokens as collateral. When Crypto prices crash, as it happened recently, calls for additional collateral margins, if not met, leads to liquidations triggered by bots or software designed for this eventuality.
According to Pantera Capital partner Paul Veradittakit, several DeFi protocols minimize their counterparty exposures at this volatile juncture. Communities for many DeFi apps are rallying around to ensure that their apps do not get damaged by bad debts. For example, if the liquidator cannot sell tokens that are not liquid or the prices of tokens collapse while sold, the apps can be held responsible for the payments.
Bold Move
Token holders voted in the majority to take over a large user account in Solend temporarily after the app failed to reach out to the user. There were threats of massive liquidation, and if the bots had triggered the liquidation, it would have put a strain on the Solend network and created chaos.
The Solend team, after account takeover, can liquidate positions in such a manner so that there is less effect on the liquidated token price after an over-the-counter sale with a negotiated buyer. It is thought that the taken over account of the larger user will benefit from the coin sale after liquidation proceeds. This move is unconventional, breaches the norms of DeFi, and has caused Crypto Twitter to fume with anger. Also, those who voted for the proposal against a single crypto account have the lion’s share of tokens undermined the “community” advocated by DeFi.
With many other DeFis, a handful of token holders hold a majority of coins, and they can influence or control votes if another DeFi makes a similar attempt. Technically, voters of other apps can do something similar to taking control of the largest accounts, but this may cause a public outcry.
