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Marinade Finance's $mSOL Token Depeg Triggers Major Debate and Liquidations in DeFi World

Temporary turmoil: mSOL's 20% dip in brief de-pegging event leads to widespread liquidations, highlighting risk management challenges in DeFi.

December 12, 2023 by Sheldon

In a startling turn of events, the DeFi community faced a significant upheaval when $mSOL, a liquid SOL stake token, experienced a brief de-pegging from its original value, dipping almost 20%,  plummeting even below that of SOL. This unexpected market move led to widespread liquidations on major borrowing and lending platforms such as Kamino and Marginfi, sparking intense debates across social media platforms like Twitter.

 The root of the crisis can be traced back to a single seller who offloaded almost $8 million worth of mSOL. Due to the relatively low liquidity in the market, this massive sell-off resulted in a temporary but significant depeg of the token. This situation raised critical questions about the stability and resilience of liquid stake tokens (LSTs) in the DeFi ecosystem.

 As the event unfolded, Solend, another prominent lending and borrowing platform, declared its immunity to the crisis, stating that its system does not consider LST de-pegging for liquidation purposes. This stance highlighted platforms' varying approaches to market volatility and asset valuation. On the other hand, Marginfi maintained that their liquidation process, which triggers when assets reach a specific liquidation price, is a fair reflection of market operations, even in cases of temporary de-pegging.

This incident has significant implications for the numerous airdrop farmers and investors utilizing leveraged borrowing strategies within these platforms. The exact scale of the liquidations remains unclear, but it is evident that many participants faced substantial risk to their assets.

 This event serves as a crucial lesson for participants in the DeFi sector, particularly those engaged in point farming or other high-risk activities. It underscores the importance of understanding and managing risk in the volatile world of decentralized finance. The community's growing consensus is that more education and awareness are needed to help users navigate these risks and make informed decisions in the DeFi landscape.

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