from Patrick McKenzie | by Patrick McKenzie

Patrick McKenzie


5 months ago

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In other crypto news, Solend is mostly unable to function due to a combination of congestion and market movements, and depositors there will likely suffer some bad debt. From the (public) Discord ~20 minutes ago:

"Explain that." Solend is a protocol which operates pools where depositors put in various assets (to earn an interest rate) and can borrow against their assets (paying an interest rate). Rates are dynamic and per asset. Tracking so far?

OK, someone (a whale) put in a lot of Solana and withdrew USDC (dollars). They now owe the protocol, and by extension, other users dollars. If the value of their Solana declined precipitously, the protocol was supposed to liquidate the SOL. Mechanisms here are complicated.

The very short version of that is "If the price of SOL goes down a lot, the liquidity to buy SOL for dollars available to automated computer programs can be entirely tapped, resulting in liquidations not happening fast enough. This leaves the protocol with 'bad debt.'"

There is a buffer for the bad debt, and after that buffer is exhausted, either some actor decides to donate to depositors or depositors are not able to withdrawal all of their collateral even if they repay their loans.

"Do you have a disclosure to make?" I have a trivial amount of money in this protocol and may be at risk of swapping it for comedy gold. (It was one of the ways I put on my funny-money Tether short, because friends kept telling me "You can't knock DeFi without trying it.")

I did not end up mining comedy gold, but instead spent ~2 hours with a UI someone in the project had cooked up repeatedly clicking buttons to function as a liquidator bot since, it seemed, all the non-human robots were nonfunctional during the early Japanese evening.

Might make a BAM issue out of this experience, but the brief version is: Start with USDC on Solana. Use the liquidate UI to buy the whale's bad debt at a 5% discount; the protocol now owes you 103.5% SOL for your USDC at the oracle's current market price. Hopefully it has it.

In the case where the protocol actually has the SOL liquidity, great, you now get SOL. Sell (which for me could only be through distributed exchanges at a punishing fee and slippage.) Ideally, you now have more USDC than you started.

In the case where the protocol does not, you now get a tokenized IOU. The Solend team had managed up the APR they were paying for SOL deposits into the 2,400-2,600% range, so as e.g. SOL came off staking with validators (early evening in Japan), X00k+ of them were attracted.

Anyhow, in return for capital risk (note that holding volatile assets in volatile times is not risk free) and stupidly misapplied professional labor I made something approaching a reasonable hourly rate starting with an iPhone of capital.

"So was the problem resolved?" Well the protocol owes people at least $6 million which doesn't exist and the original whale's assets were entirely dissipated (and so they presumably will not come back to top up the account to be nice), so presumably there will be an announcement

"Did you enjoy this, your first intense DeFi experience which involved more than trivial amounts of brainsweat?" Worse graphics than Dyson Sphere Project, worse moment-to-moment feel than poker, worse infrastructure than almost any financial system I've ever used.

"That sounds like the sort of thing you will shortly say you grudgingly enjoyed." I grudgingly sort of enjoyed it, second thoughts. I don't recommend it to anyone, obviously, but my friends who said "This will push your buttons" were not wrong with that prediction.

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