Leading decentralized finance (DeFi) protocol Aave has frozen Ethereum (ETH) borrowing as the leading smart contract platform prepares for the highly anticipated merge.
Citing advice from analytics firm Block Analitica, a community proposal says that the Ethereum merge will present significant risks to the DeFi borrowing and lending markets.
The proposal names three main risks that the merge presents to the Aave ecosystem, mainly stemming from an overly high utilization of ETH. They include the potential for liquidations to become impossible, the possibility of Staked Ether (stETH) positions making negative annual percentage yield and the threat of ETH suppliers withdrawing all of their liquidity as a form of caution.
“The risk of high utilization in the ETH market is driven by users potentially benefiting from the forked PoW ETH (ETHW) by borrowing ETH before the merge. High utilization interferes with liquidation transactions, thus increasing the chances of insolvency for the protocol.
In addition, a high ETH borrow rate can make stETH/ETH recursive positions unprofitable, increasing the chances that users unwind their positions and drive the stETH/ETH price deviation further, causing additional liquidations and insolvency.”
An overwhelming 96.1% of community members voted “Yes” to the proposal, thus putting a freeze on the borrowing of ETH.
According to the original forum post, Block Analitica will be rewarded 60 AAVE from the governance system for coming up with the proposal.
“If this proposal is adopted, a one-time payment of 60 AAVE will be transferred from the Aave governance to the MakerDAO pause proxy. This is intended to compensate for Block Analitica’s research and development costs in connection with this proposal.”
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