Sebastian Sinclair

Macauley Peterson

<div id="highlights-block_62afc95119535" class="highlights">
 <ul>
 <li>Solend Labs ponders emergency powers, in challenge for decentralized governance ideal</li>
 <li>Should the price of SOL have dropped below $22.30 before a vote was made, chaos would have ensued Solend Labs said in a post</li>
 </ul>
 
</div>



Users of the Solana-based lending and borrowing protocol Solend granted emergency power to the platform&#8217;s steward in order to mitigate liquidation risks presented by Solend&#8217;s biggest bagholder.



Those powers, gifted via the Solend-based decentralized autonomous organization&#8217;s (DAO) first <a href="https://realms.today/dao/7sf3tcWm58vhtkJMwuw2P3T6UBX7UE5VKxPMnXJUZ1Hn/proposal/HuaL6cDtuNtfnJgvwMnYiZDHVCoLAuDtVFgJD8kYChJ4" target="_blank" rel="noreferrer noopener">governance proposal</a>, allow Solend Labs to take over the whale&#8217;s account in order to execute an over-the-counter trade should the price of Solana&#8217;s native token SOL drop below $22.30.



But, after public outcry, a <a href="https://realms.today/dao/7sf3tcWm58vhtkJMwuw2P3T6UBX7UE5VKxPMnXJUZ1Hn/proposal/3geE5P3D7VJRaNNDVfZciGsXgwGiao1hSNpRM6jWNa5A" target="_blank" rel="noreferrer noopener">second signalling proposal</a> sought to walk back the first.



The first proposal gave developers a green light to implement special margin requirements for large whales borrowing more than 20% from the protocol&#8217;s primary pool, with a 35% liquidation threshold now in place.



More than 1.15 million votes were cast in favor of authorizing the special powers or roughly 97.5%, versus 30,101 against (2.5%). However, a single account, representing 1% of the total users participating, cast more than 1 million votes in the affirmative, Solana-based Realms <a href="https://realms.today/dao/7sf3tcWm58vhtkJMwuw2P3T6UBX7UE5VKxPMnXJUZ1Hn/proposal/HuaL6cDtuNtfnJgvwMnYiZDHVCoLAuDtVFgJD8kYChJ4/explore" target="_blank" rel="noreferrer noopener">data shows</a>, revealing a stark centralization in the decision-making process.



The whale <a href="https://solend.fi/dashboard?wallet=3oSE9CtGMQeAdtkm2U3ENhEpkFMfvrckJMA8QwVsuRbE" target="_blank" rel="noreferrer noopener">account</a> in question presents a systemic risk to the protocol, Solana&#8217;s network and its users, due to the account holding &#8220;an extremely large margin position&#8221; close to liquidation, Solend said in a <a href="https://blog.solend.fi/slnd1-mitigate-risk-from-whale-1504285ab4d2" target="_blank" rel="noreferrer noopener">post</a> ahead of the vote on Sunday. 



After repeated attempts to contact the whale, Solend said it was put to a vote to take premptive action over the account. The move raises questions regarding the principles and spirit of decentralized finance, which aims to remove middlemen and empower financial self-sovereignty. 



Roughly $108 million worth of USDC and USDT is being borrowed by the whale, against $170 million worth of SOL deposited as collateral in the protocol&#8217;s main pool. That represents roughly 88% of USDC borrows and 95% of SOL deposits for the lending platform.



Should the price of SOL drop below $22.30 the whale’s account could be liquidated for up to 20% of their borrowings, estimated to be worth $21 million, Solend said. SOL was last seen changing hands for around $32.60 after bouncing from a 24-hour low of $29, <a href="https://www.blockworksresearch.com/assets/sol/" target="_blank" rel="noreferrer noopener">Blockworks Research</a> data shows.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">&#8220;It&#8217;d be difficult for the market to absorb such an impact since liquidators generally market sell on DEXes,&#8221; Solend said in its post. &#8220;In the worst case, Solend could end up with bad debt. This could cause chaos, putting a strain on the Solana network.&#8221;</blockquote>



Following concerns about the potential risk, users have begun withdrawing assets en masse, forcing USDC and USDT utilization in the protocol&#8217;s primary pool to spike to 100%, Solend confirmed in its post. The result leaves remaining depositors unable to withdraw. What&#8217;s worse, any positions collateralized by deposits of the two stablecoins are unable to be liquidated.



&#8220;Letting a liquidation of this size to happen on-chain is extremely risky.&nbsp;DEX liquidity isn’t deep enough to handle a sale of this size and could cause cascading effects,&#8221; Solend said.



The governance move has roiled DeFi proponents, who see it as a tacit admission that not only Solend&#8217;s design choices failed, but the Solana Ventures-backed protocol is centralized — a DAO in name only.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Sqlana&#39;s Solend leverage platform just spun up a fake vote as cover to control a whale&#39;s account so that it wouldn&#39;t get liquidated &amp; crash the <a href="https://twitter.com/search?q=%24SOL&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$SOL</a> server again. Solend is an official portfolio company of Solana. Insider deals. Central servers. This is the definition of CeFi. <a href="https://t.co/AZ5N3eJmaB">https://t.co/AZ5N3eJmaB</a>&mdash; Evan Van Ness 🦇🔊 (@evan_van_ness) <a href="https://twitter.com/evan_van_ness/status/1538610017573773318?ref_src=twsrc%5Etfw">June 19, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



It&#8217;s unclear what the next steps are following the second vaguely-worded proposal meant to placate critics of the first. The proposal, which was approved by a similarly overwhelming majority of SLND — the protocol&#8217;s governance token — ostensibly &#8220;invalidates&#8221; the first, and lengthens the duration of governance votes from a comically short six hours to a full day.



The team also pledges to &#8220;work on a new proposal that does not involve emergency powers to take over an account.&#8221;



The conundrum marks another headache for the budding Solana ecosystem, whose network has experienced <a href="https://cms.blockworks.co/solana-price-dips-after-another-network-outage/" target="_blank" rel="noreferrer noopener">several outages</a> this year, shaking faith in the stability and resiliency to maintain consistent uptime in the face of intense market activity.



Solana has a history of downtime caused specifically by on-chain liquidations, though this instance represents a 100 times greater impact to the network and ecosystem, Solend <a href="https://twitter.com/solendprotocol/status/1538553657158881280?s=20&amp;t=gL7a9q79nlz9kBdM8WbYaA" target="_blank" rel="noreferrer noopener">tweeted</a> Sunday. 



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">&#8220;It&#8217;s extremely risky for everyone involved.&#8221;</blockquote>



Fears of market contagion continue to plague the confidence and resolve of the crypto market which is still reeling from the aftereffects of Luna&#8217;s implosion in May and lender Celsius halting <a href="https://cms.blockworks.co/celsius-lending-platform-suspends-withdrawals-and-transfers/" target="_blank" rel="noreferrer noopener">withdrawals and transfers</a> a week ago.



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Solana Lending Protocol Faces Governance Conundrum

<div id="highlights-block_eec3016a22b7dcde07607dcf874ead2e" class="highlights">
 <ul>
 <li>Proposal 20, which passed over the weekend, is expected to take effect on May 4</li>
 <li>Over 3 million JUNO tokens will be transferred to a community-controlled wallet</li>
 </ul>
 
</div>



Juno, a smart contract platform that runs on the Cosmos blockchain, is on the verge of resolving a two-month-old governance conundrum.



An upgrade, slated to be executed Wednesday, will strip some three million JUNO tokens from a single wallet, belonging to an organization alleged to have exploited a loophole in the token’s initial distribution.



Juno’s token was distributed to stakers of the native Cosmos asset ATOM, but the team implemented a 50,000 “whale cap” — and deliberately excluded centralized exchanges, such as Kraken and Binance, which offer staking services.



In March, 40% of token holders <a href="https://cms.blockworks.co/juno-network-stakeholders-to-decide-fate-of-whales-millions-in-a-crypto-first/" target="_blank" rel="noreferrer noopener">signaled their intent</a> to remove tokens that were distributed to a collection of wallets that were later determined to belong to a single entity, in contravention of the stakedrop rules.



On-chain sleuths <a href="https://wallet.keplr.app/#/juno/governance?detailId=4" target="_blank" rel="noreferrer noopener">discovered</a>, in October 2021, that multiple recipient wallets of the initial drop were pooled together, implying that they belonged to the same owner or organization.



But stripping the JUNO assets from the wallet was controversial.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Regardless of your take on it, <a href="https://twitter.com/hashtag/Prop16?src=hash&amp;ref_src=twsrc%5Etfw">#Prop16</a> should be a big wake up call. Politics is coming to a blockchain near you, and no chain or DAO will be immune. What&#39;s happened on Juno could happen on any chain (or DAO) with on-chain governance&#8230; a community can vote to change things.&mdash; Multichain Maximalist 🦇🔊⚛️🏴 (@JakeHartnell) <a href="https://twitter.com/JakeHartnell/status/1503224734258909184?ref_src=twsrc%5Etfw">March 14, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Some viewed the idea of confiscating tokens as a property rights violation of sorts. But centralization of governance power was broadly considered a risk to the long-term prospects of the whole platform.



The owner of the wallet in question <a href="https://gist.github.com/junowhale/f8b3e936cd85ef1501de3e372a10458e#about-juno-airdrop-and-prop4" target="_blank" rel="noreferrer noopener">came forward</a> to explain that they were a team that managed assets on behalf of clients. In the ensuing <a href="https://commonwealth.im/juno/discussion/4044-softwareupgradeproposal-stakedrop-remediation-for-gameccndebo" target="_blank" rel="noreferrer noopener">community discussion</a>, a new consensus emerged. The wallet had not gamed the airdrop, but was instead ineligible for the stakedrop on account of being a virtual currency exchange service.



Before any concrete action could take pace, the blockchain <a href="https://wallet.keplr.app/#/juno/governance?detailId=17" target="_blank" rel="noreferrer noopener">had to be upgraded</a> to allow Juno governance to execute smart contracts. Then, a subsequent proposal could implement the voter’s intent on-chain.



Meanwhile, the rogue entity, known as CCN, made <a href="https://wallet.keplr.app/#/juno/governance?detailId=18" target="_blank" rel="noreferrer noopener">a proposal of its own</a>, offering to split the funds equally with the DAO. It then <a href="https://twitter.com/wolfcontract/status/1514280496192278534" target="_blank" rel="noreferrer noopener">used its tokens</a> to vote in favor of the compromise. But the proposal was overwhelmingly rejected.



CCN <a href="https://wallet.keplr.app/#/juno/governance?detailId=19" target="_blank" rel="noreferrer noopener">tried once more</a>, offering to distribute the JUNO proportionally to its clients, following a know your customer (KYC) process from an independent auditor. That, too, was resoundingly defeated, with just 3.6% voting in favor.



The <a href="https://wallet.keplr.app/#/juno/governance?detailId=20" target="_blank" rel="noreferrer noopener">latest proposal</a>, 20, gave the community a vote on an upgrade that will remove CCN&#8217;s disproportionate token ownership and voting power. It passed April 29 with 71.2% of the vote.



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Juno’s DAO Votes To Confiscate $35M in Tokens From Whale in Messy Dispute

Jacquelyn Melinek

<div id="highlights-block_265c0c79e983282d327edc3de0c8788e" class="highlights">
 <ul>
 <li>If the whale abruptly pulled out their funds — currently worth about $122 million — they could single-handedly wipe out JUNO liquidity on decentralized exchanges</li>
 <li>The proposal, if passed, could set an “interesting” and “potentially dangerous” precedent, a community member named Kavaskous on Twitter said</li>
 </ul>
 
</div>



In less than 24 hours, thousands of Juno token stakeholders have banded together in a bid to correct perceived errors in the network’s stakedrop by confiscating one crypto whale’s token wealth. A stakedrop is a method of widely distributing tokens as a reward for staking the tokens of another blockchain or decentralized application.



Holders of the governance token of Juno, a layer-1 blockchain in the Cosmos ecosystem, are <a href="https://wallet.keplr.app/#/juno/governance?detailId=16" target="_blank" rel="noreferrer noopener">voting</a> on proposal #16 to reduce a whale address from over 2.5 million JUNO tokens to 50,000 tokens — removing over 98% — which would be placed in a community reserve fund. For reference, a whale is an entity or individual that owns a significant amount of tokens for a specific cryptocurrency. The move, according to the text of the proposal, comes after “numerous discussions with the community.”



The Juno Network launched with the full intention to be completely community driven, a community member TheJunonaut <a href="https://twitter.com/TheJunonaut/status/1501957396779855874?s=20&amp;t=eJ6QATBcRs-FN44TVTioPw" target="_blank" rel="noreferrer noopener">tweeted</a>. “Hence, $JUNO was distributed to $ATOM stakers via a 1:1 stakedrop with a hard whale cap of 50K as the community agreed to ensure fair distribution across the network,” they added.



At issue is whether the individual or entity in question deliberately circumvented the rules of the stakedrop by staking ATOM across dozens of wallets, thereby unfairly inflating its resulting stake in JUNO. The disparate wallets were subsequently consolidated into one.



Given the amount of tokens the whale now has, if they abruptly converted their JUNO to other assets, they could single-handedly wipe out liquidity on decentralized exchanges, resulting in a sharp decline in the JUNO price. But the concern among community members is not limited to their short-term financial interest. The asset concentration itself creates risks to on-chain governance by enabling the whale to potentially bribe validators — the guardians of network consensus — with delegations to serve the whales’ interests, a community <a href="https://gateway.ipfs.io/ipfs/Qmf3bGHiSiPTTNohNv4tBn5rvTChoQZNp8UDbGMxPq9HYC#Correcting-the-gamed-stakedrop---Proposed-by-Core-1-after-numerous-discussions-with-the-community" target="_blank" rel="noreferrer noopener">post</a> said.



“Proposals as a whole have flaws to them, but this proposal itself is super complicated,” Twitter user cryptolikemo said <a href="https://twitter.com/L1am_Crypto/status/1502316603177906178" target="_blank" rel="noreferrer noopener">during a Twitter Spaces</a> discussion, Friday.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
“People are saying this is black and white, and saying, ‘yes is the obvious answer,’ and if you voted no, people are saying you’re evil.”
</blockquote>



It’s not clear that gaming the system was the whale’s explicit goal, however. The ATOM staking, required to be eligible for JUNO’s airdrop, must have occurred prior to Feb. 18, 2021, the date of an important <a href="https://stargate.cosmos.network/resources" target="_blank" rel="noreferrer noopener">Cosmos milestone</a> upgrade. But Juno’s stakedrop <a href="https://medium.com/@JunoNetwork/jun%C3%B8-tokenomics-and-utility-powering-the-worlds-first-fully-interoperable-smart-contract-ce9f490c4d97" target="_blank" rel="noreferrer noopener">was not announced</a> until July.



Regardless of the intent, not everyone agrees with the concept of redistributing wealth in this way.



“People who game airdrops deserve to keep their money,” George Wosmongton, a pseudonymous founder of <a href="https://cms.blockworks.co/?s=osmosis" target="_blank" rel="noreferrer noopener">Osmosis</a> Protocol, <a href="https://twitter.com/wosmongton/status/1502116226637524992?s=20&amp;t=pgZ6VJNQzjSZTyv36Uj-wQ" target="_blank" rel="noreferrer noopener">tweeted</a>. Wosmongton said holders should direct the blame toward the JUNO team instead of condemning the whale.



The wallet address in question currently has about <a href="https://www.mintscan.io/juno/account/juno1aeh8gqu9wr4u8ev6edlgfq03rcy6v5twfn0ja8" target="_blank" rel="noreferrer noopener">3.1 million JUNO tokens</a>, worth about $122 million as of Friday. The tokens are currently bonded, meaning they are staked to the network and are receiving additional rewards. Overall, about 28.77 million, or 38.5%, are bonded JUNO tokens, and 44.6 million, or 59.73%, are unbonded tokens, according to JunoScan <a href="https://junoscan.com/" target="_blank" rel="noreferrer noopener">data</a>.&nbsp;



Bonded tokens contribute to the security of delegated proof-of-stake networks such as Juno. In return for this commitment on the part of token holders — in this case, it takes 28 days for tokens to unbond — owners continuously earn rewards in the form of more tokens. By contrast, unbonded tokens are not locked, and an owner can transfer or exchange them at any time.



“If every day they’re getting 10% of staking rewards, that’s a lot of money,” cryptolikemo said. The whale was regularly selling a significant fraction of the staking rewards into the market, <a href="https://twitter.com/TheJunonaut/status/1501957438584475648" target="_blank" rel="noreferrer noopener">data shows</a>.



The proposal could be a first for the crypto community as it tries to redistribute the wealth of a major holder in the network. This gives some members pause, while others underline the urgency of the matter.



“Action needs to be taken quickly if the proposal goes through,” Liam Connor, Cosmos NFT YouTuber, said on the Twitter space meeting.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">
“If it takes three weeks to come up with a plan of action after, the whale will unbond and sell the tokens before we take the wallet.”
</blockquote>



Juno Network’s future is uncertain, and the situation may have broader implications for token governance and redistribution among crypto communities, cryptolikemo hinted.



If the proposal goes through, this could set an “interesting” and “potentially dangerous” precedent, Twitter user Kavaskous, who is also a crypto miner and ambassador and liquidity provider for Osmosis, said.



“If it’s executed without any problems [and] as long as this is a one-time thing, I think it’ll be fine in the long term, but if it gets repeated it could be slippery,” Kavaskous said.



Macauley Peterson contributed reporting for this story.



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