AAVE is suspending ETH borrowing as the risk of high utilization ahead of the merger could impact ETH liquidity.
The DeFi protocol community voted between August 30, 2022 and September 2, 2022 to suspend ETH lending to protect the protocol from risks related to over-borrowing. According to research firm Block Analitica, the suspension of loans will prevent most of the ETH funds in AAVE’s loan pool from being lent out, as people hoping to get free tokens from a new ETHPOW fork ahead of the upcoming merger try to buy the to strengthen ETH balances.
Talk of a new Ethereum fork began in late July 2022 as the date of the so-called merger approached. A fork is a permanent blockchain split when some members of a blockchain community disagree about the future of the blockchain and want to define a new set of rules for its future operations. Sometimes a fork results in a new token being issued.
The motive for the fork is to help miners keep their jobs after the merger. The merger will change the consensus mechanism of the Ethereum network from proof-of-work to proof-of-stake, meaning that the “miners” who validate transactions in a proof-of-work system will be replaced by “stakers”. would.
This change is bad news for miners, as it would render nearly $5 billion worth of graphics cards and specialized mining computers, known as ASICs, worthless if they could not be reused.
A small cohort of developers has been working on a fork of the current Ethereum blockchain that would preserve the proof-of-work consensus mechanism and help miners keep using their expensive equipment.
Users stock up with ETH to get free fork tokens
The lead miner who assembled the development team has said that current ETH holders will receive free tokens from the proof-of-work fork called ETHPOW. A snapshot of all wallets with ETH is taken before the new tokens are distributed.
As a result, many users are borrowing ETH from AAVE, resulting in over 70% utilization, meaning most ETH has been loaned from AAVE. This high utilization means there is little ETH available for collateral liquidation should an AAVE borrower fail to meet a certain debt-to-value ratio, creating insolvency issues for the protocol. Users will be liquidated if their collateral value falls below the amount borrowed from AAVE.
Many users deposited ETH into Lido to get another token, plugged eth. They then lock the staked ETH into AAVE as collateral to borrow ETH to deposit back into Lido and the process repeats. This recursive process eventually becomes unattractive when the ETH lending rate on AAVE is above the rewards Lido is offering for staking ETH. The unprofitability could result in users converting their staked ETH into ETH, putting pressure on the price of stETH. This sell-off would increase the pressure on people converting stETH to ETH to get free ETHPOW.
Remove ETH from liquidity pools
Bobby Ong, the co-founder of Coingecko, advised those hoping for free ETHPOW to ensure their ETH is not running on Optimism, Arbitrum, or any of the other Ethereum Layer Two protocols, but is being moved to the Ethereum mainnet. He also advised users to unwrap all wrapped ETH and remove ETH liquidity from liquidity pools.
Binance has suspended ETH transactions on Arbitrum, Optimism, and the Ronin sidechain until the merger is complete.
There was no word from another lender and AAVE rival Compound Finance regarding the suspension of ETH withdrawals.
To be[In]Crypto’s Latest Bitcoin (BTC) Analysis, click here.
Disclaimer
All information contained on our website is published to the best of our knowledge and for general information purposes only. Any actions taken by the reader based on the information contained on our website are entirely at your own risk.
Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers
Comments are closed.