Solend, a lending and borrowing protocol built on the Solana blockchain, has gained recognition for expanding opportunities for Solana users to increase their financial gains. Since its launch, it has filled a significant gap in the Solana ecosystem and has attracted an impressive $100 million in deposits in just over a month.
The success of Solend can be attributed to the high scalability of the Solana blockchain, which is known for its speed and low transaction fees. With the arrival of Solana, users can now efficiently utilize their capital by lending and earning interest, allowing their idle funds to generate profits from various opportunities. Solend is a community-driven project, where decisions are made collectively through voting, aligning with the principles of decentralization.
This article delves into the workings of Solend, including its lending and borrowing features, earning potential, creation of pools, associated risks, and the whale issue, among other related concepts.
What is Solend?
Solend is an autonomous platform that enables users to borrow or lend assets on the Solana network. The protocol uses an algorithm to determine interest rates and collaterals, allowing users to earn interest and leverage crypto assets for long or short positions. The native token of Solend, SLND, provides exposure to Solana’s decentralized finance (DeFi) market.
Since its launch in August 2021, Solend’s total value locked (TVL) has grown exponentially from less than $20 million to approximately $1 billion in just three months. The project originated from the June 2021 Solana Season Hackathon, where it emerged as the winner. This success motivated the project to enter the world of DeFi as a lending protocol.
How does Solend work?
At its core, Solend facilitates decentralized lending on the Solana network. Users can deposit assets into their Solend accounts and earn interest. They can also collateralize their deposits to obtain loans without the need for extensive underwriting processes typically required by traditional institutions. Smart contracts automate the lending process, incorporating various clauses to set borrowing limits and collect interest.
To engage in lending and borrowing on Solend, users need a Solana wallet with sufficient funds to cover gas fees. They also require SOL, the native cryptocurrency of Solana, to access the network’s functionalities. Solend supports a growing number of crypto tokens, including native coins, stablecoins, and memecoins, allowing users to leverage a diverse range of assets. The listing process for tokens is governed by the community, in line with the principles of DeFi.
Earnings and Rewards
Lenders on Solend earn interest based on the annual percentage yield, similar to traditional lending practices. Additionally, they receive rewards in the form of SLND tokens, the native tokens of Solend.
Pools
Solend operates a main global liquidity pool, along with several smaller isolated and permission pools. Tokens with reliable oracles and substantial liquidity are listed in the main pool, while tokens with lower liquidity and higher volatility are initially listed in isolated pools before potentially transitioning to the main pool.
Creators of isolated pools earn 20% of the origination fees generated within their specific pools. The token listing and pool creation processes are community-driven.
Account Panel
Solend’s account panel is user-friendly and intuitive, allowing users to navigate the platform without extensive tutorials. It provides options for users to view their earnings potential through the “Supply” feature and the amount they can borrow based on their crypto assets through the “Borrow” feature.
The account panel also displays a red bar indicating the liquidation threshold for each loan. If the value of the collateralized asset falls below this threshold, the system can liquidate the user’s assets and return the funds to the lenders.
How Solend Generates Revenue
Solend generates revenue by charging protocol fees on loans. These fees contribute to an insurance fund that provides coverage for the platform. Users can borrow and sell crypto assets without incurring excessive transaction fees. Solend’s treasury safeguards the assets in the pool in the event of exploits or hacks.
Risks Associated with Using Solend
While Solend offers numerous benefits, there are associated risks to consider:
Incorrect Feed by Oracles: Oracles reporting inaccurate price feeds can disrupt Solend’s operations. Price feeds from Pyth Network and Switchboard trigger liquidations on the platform. Incorrect reporting can lead to wrongful liquidations. In November 2022, Solend experienced an oracle exploit resulting in $1.26 million in bad debt. The affected pools were disabled, and exchanges were notified of the exploiter’s address.
Smart Contract Vulnerabilities: As an algorithmic decentralized protocol, Solend is susceptible to bugs or vulnerabilities in its smart contracts. Malfunctions could result in the theft or permanent loss of funds.
100% Utilization of Funds: Like other DeFi pools, Solend faces the risk of 100% utilization of funds. If the pool has no remaining assets available, users cannot borrow. However, as borrowers repay their loans or new supplies are added, this problem can be mitigated.
Liquidations: Solend offers overcollateralized loans, but market volatility can lead to the liquidation of funds if asset values fluctuate significantly. Users must closely monitor their loans and investments.
Large, Single Borrowers (Whales): Solend’s vulnerability lies in the presence of large borrowers known as whales. These borrowers hold significant influence over the protocol. In June 2022, a whale with $108 million almost crashed the Solana network. The protocol narrowly avoided the liquidation of 95% of SOL deposits in its lending pool. To address this issue, a borrower ceiling of $50 million was implemented.
The Future of Solend
Despite the vulnerability exposed by the whale incident, Solend has brought the power of DeFi to the Solana network, offering users opportunities to enhance their profits. The developers’ ability to handle the situation and satisfy stakeholders has bolstered the protocol’s credibility. As vulnerabilities are addressed and the platform evolves, more users may find Solend enticing as it adds a strong DeFi element to the Solana ecosystem.