Solend is a decentralized lending and borrowing platform built on the Solana mainnet. Users can earn interest on their deposits and pay interest when they borrow from the lending pool. Its native token, SLND, powers Solend.
Since its rise in 2021, Solend has captured the interest of several investors and is arguably the leading lending platform on Solana. This article provides a detailed overview of the lending protocol and shows several ways to earn on Solend.
We will cover the following topics in this guide:
- What Is Solend?
- How Does Solend Work?
- How to Earn Using Solend?
- What Are the Risks of Using Solend?
- The Future of Solend
What Is Solend?
Solend is an algorithmic decentralized project offering users lending and borrowing services. The project utilizes the energy-efficient and fast layer-1 blockchain network Solana. The protocol has SLND as its native cryptocurrency.
Unlike traditional lending firms that mandate users to submit personal information about themselves, decentralized lending protocols like Solend do not require users to submit their data. All that is needed to secure a loan is collateral from the borrower. The protocol uses an algorithm to determine interest rates. Another algorithm determines borrowers’ collateral amounts.
Solend came to the limelight in June 2021 when it came out on top in a hackathon program held by Solana Labs. At the time, the team built a prototype of its lending platform. It paved the way for the Solend developer team to step up the project. The Solend project launched in August 2021.
Solend was founded by a blockchain developer with the pseudonym – Rooter. Most members of the developer team also remain pseudonymous.
The Solend token, SLND, serves as a utility and governance token. Currently, the price of SLND is $0.36. Solend released the SLND token in November 2021 after an initial DEX offering (IDO). The IDO raise brought $21 million into the project’s purse. It has a total supply of 100 million tokens. Users get rewarded in SLND. They can use the token to exercise voting rights.
How Does Solend Work?
Anyone with a funded Solana wallet can connect their wallet to the Solend protocol and access its services. An example of such a wallet is the non-custodial digital wallet, Phantom wallet.
The protocol performs two primary functions – lending and borrowing. The lending feature lets users deposit or stake their cryptocurrency assets in a pool. By doing so, users earn interest based on the amount of their staked assets. As of the time of writing, $28.5 million has been supplied by users into the Solend protocol.
Users who deposit their cryptocurrency assets into the protocol can also secure short-term and long-term loans. The only requirement from the borrower is to deposit the required collateral. At the time of writing, investors have borrowed $5.16 million from the protocol.
Solend also allows users to leverage long or short. Leveraging occurs when an investor uses borrowed crypto assets to trade more cryptocurrencies.
Smart contracts govern the entire protocol’s services. Smart contracts are programming codes put together to perform specific tasks. A smart contract is deployed as an algorithm to determine interest rates for lenders and collateral for borrowers.
Like several decentralized lending platforms, borrowed assets on Solend have a liquidation threshold. The following illustration explains the meaning of a liquidation threshold better:
Imagine you deposit a collateral of $100 worth of SOL to borrow $50 worth of USDC stablecoin to settle an immediate bill. Let’s assume the threshold for the trade is 80%. If the value of your collateral in SOL drops close to $80, the protocol’s algorithm will trigger the liquidation of part of your collateral into the balance of lenders. This move will cover the loss.
You must increase your collateral by depositing more crypto into the platform to avoid such loss.
How to Earn Using Solend
To earn using Solend is easy to understand and implement. Here are the primary ways to earn using Solend:
Deposit to Earn Interest
Anyone who deposits their funds into the protocol’s lending pool will earn interest based on the amount of their deposited asset(s).
Another way a depositor can earn on the platform is by gaining exposure to crypto assets. In what way? If the price of a particular cryptocurrency deposited increases over time, someone who owned that asset when it was cheaper would be in gain.
Leveraging is a feature that allows borrowers to use borrowed crypto assets to perform trading activities. It bolsters the trading power of the borrower, enabling them to use more capital than they own. Traders who leverage can use either the long or short position.
Opening a long position means that you believe that the price of the asset in question will go up. To illustrate this, imagine you want to open a long position of $1000 worth of ETH. If the system permits a 10x leverage, you can deposit only $100 and get $1000 worth of ETH. Let’s assume the price of 1 ETH is $1600. If the price of ETH goes by 20%, you get $200 in profit.
When a trader opens a short position, it means they are betting on the price of an asset to drop in price.
To understand this, we use an example where you want to open a short position of $1000 worth of ETH. Using a 10x leverage, you gain access to $1000 by depositing collateral of $100. If you sold the $1000 in ETH when it traded at $1600, it would mean you sold 0.62 ETH.
If the ETH price drops by 20%, its trading price becomes $1,280. If you buy back 0.62 ETH, you will spend $793.6 while pocketing a profit of $206.4.
The disadvantage in leveraging long or short is that if the plan goes the other way around, your collateral will be liquidated, resulting in losses.
What Are the Risks of Using Solend?
Despite the advantages of using Solend, there are risks tied to using the protocol. Here they are:
Smart Contract Risks
Since Solend is an algorithmic protocol, it uses smart contracts to manage transactions. These smart contracts are subject to flaws and attacks by bad actors. Hackers can steal illicit funds from the Solend protocol when they exploit smart contracts on the platform.
While this cannot be eliminated, Solend puts together several measures to mitigate the risks of smart contract attacks. These include:
- Introduction of code auditing by a security firm called Kudelski Group.
- A bug bounty program that offers up to $1 million to anyone who realizes a significant bug in the protocol.
- A treasury with $20 million as insurance against security breaches exists.
An oracle is a third-party service that connects smart contracts to the outside world. One of the primary functions of oracles is to feed smart contracts with an up-to-date price of crypto assets. The oracle responsible for this is called the price oracle. Solend uses Pyth and Switchboard for its price feeds.
In cases where the price oracles get exploited, bad actors get to manipulate the price of assets and withdraw stolen funds into their wallets. An attack on the protocol’s price feeds was the cause of an exploit in November 2022. Bad actors manipulated the price of assets and stole $1.26 million from the protocol.
100% Utilization Risk
The utilization rate of a pool is the percentage at which the pool can be loaned out. Solend uses a 100% utilization rate. It is hazardous to anyone who may be in urgent need of funds. How?
To explain, let us go back to how Solend works – users deposit money into the pool (supply), and others borrow money from the pool (borrow). If all the funds in the supply equal the total funds on the borrowing side, there would be no funds for anyone who wants to withdraw or borrow. This will remain this way until someone deposits fresh funds into the pool or repays a loan.
Such a case can occur when a user requests a loan or withdrawal, representing a large portion of the entire pool.
Since Solend does not require users’ personal information to secure loans, it offers over-collateralized loans. This means a user can only borrow less than the amount they deposited. For example, you can borrow $500 in SOL by depositing $1000 in USDC. But you cannot borrow $2000 worth of SOL by depositing $1000 in USDC.
The over-collateralized loan model ensures users do not default on their loans, as the protocol can always liquidate assets. Another advantage of such loans is that a user is exposed to two assets at a time – the staked and borrowed. If both assets see price uptrends, the user gains.
Despite the application of over-collateralized loans, downward price volatility can come into play. It may require borrowers to deposit more crypto to avoid liquidation.
Presence of Whale Users
A crypto whale is a user who has a large quantity of a particular cryptocurrency. If a whale should trade a large portion of their crypto holdings, it will influence the price of the asset. If the whale dumps a large quantity of the cryptocurrency they hold, the token will see a price decline, which is bad for business.
Solend once suffered because of the actions of a whale. Before June 2022, a whale had secured a loan of $108 million in USDC and USDT using the collateral of $170 million in SOL.
Things seemed fine until June 15, when the price of SOL declined amid a broader market selloff. At the time, centralized crypto lending firms like Celsius and BlockFi struggled with their finances.
With the price of SOL dropping to a $30-$40 price range, the whale got a margin call. It required that the whale deposit more funds to avoid $21 million getting lost to liquidation. A dump of that amount could affect the price of SOL, causing its value to drop further.
Attempts to contact the whale were futile, forcing Solend developers to call the whale’s action through Twitter. The move sparked worries among members of the crypto community on Twitter. To mitigate the adverse effects of liquidation on the entire project, the Solend developers released a proposal called “SLND1: Mitigate Risk From Whale.”
The proposal, which got 97.5% support from the protocol’s members, gave the developer team the power to access the whale’s account and execute the liquidation over the counter. The approach settled the matter, but it also raised questions as to the decentralization of the project.
Later, the Solend team published another proposal requesting for change of borrowing limit to $50 million, which token holders approved. Solend executed the proposal on June 21.
The Future of Solend
Since its inception in August 2021, Solend has attracted users to its ecosystem. It has also attracted several institutional investors who aided its funding in its early days.
However, like several crypto projects, Solend is a decentralized platform that learns on the go. The case in June 2022 that nearly caused its downfall is a warning lesson for the developer team.
During the November 2021 bull run, Solend held a total value locked (TVL) of $928 million in just three months. The next massive bull run may see Solend’s performance recover
This article has extensively discussed the answer to the question: What is Solend? It has also shown different ways to earn from the Solana-based DeFi lending market. If you choose to use the lending platform, be sure to do your research and take calculated risks.
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