AAVE has suspended ETH lending because of the risk of high usage leading to mergers which could affect ETH liquidity.
The DeFi protocol community voted to halt ETH lending between August 30, 2022, and September 2, 2022, in order to protect the protocol from the risks associated with excessive borrowing. According to research firm BlockAnalytica, suspending lending will prevent most of the ETH funds in AAVE’s loan pool from lending, as people seek free tokens from a new ETHPOW fork ahead of the upcoming merge look to increase ETH balances. are expecting.
Talk about a new Ethereum fork began At the end of July 2022, the date of the so-called merge drew to a close. A fork is a permanent blockchain split when some members of the blockchain community disagree about the future of the blockchain and want to define a new set of rules for its future operation. Sometimes a fork results in the issuance of a new token.
The purpose of the fork is to help miners maintain their jobs after the merge. The merge will change the Ethereum network’s consensus mechanism from proof-of-work to proof-of-stake, meaning that “miners” who validate transactions in a proof-of-work system will be replaced by “stakers”. Will go
This change is bad news for miners, as it would render nearly $5 billion worth of graphics cards and specialized mining computers called ASICs useless until they can be reused.
A small group of developers are working on a fork of the current Ethereum blockchain that would preserve the proof-of-work consensus mechanism, allowing miners to still use their expensive equipment.
Users Stocking Up on ETH to Get Free Forked Tokens
The lead miner who assembled the development team has said that current holders of ETH will receive free tokens from a proof-of-work fork called ETHPOW. A snapshot will be taken of all wallets holding ETH before new tokens are distributed.
As a result, many users are borrowing ETH from AAVE, resulting in utilization rates of over 70%, meaning that most of AAVE’s ETH is lent out. This high utilization means that if an AAVE borrower fails to maintain a certain loan-to-value ratio, there is very little ETH available for the protocol to liquidate collateral in case bankruptcy problems arise. Users are liquidated when their collateral value falls below the amount borrowed from AAVE.
Many users have deposited ETH into Lido to receive another token, Stake Eth. They are then locking the pledged eth as collateral in AAVE to borrow ETH to re-deposit in Lido, and the process repeats itself. This iterative process eventually becomes unattractive when the ETH lending rate on AAVE exceeds the rewards offered by Lido for betting ETH. The unprofitability could result in users converting their staked ETH to ETH, which could put pressure on the price of stETH. This sell will increase the pressure on people to get free ETHPOW to convert stETH to ETH.
Withdraw ETH from the Liquidity Pool
Bobby Ong, co-founder of Coingecko, gave advice Those hoping to receive free ETHPOW ensure that their ETH is not on Optimum, Arbitrum, or any other Ethereum layer two protocol, but moved to the Ethereum mainnet. Furthermore, he advised users to open all wrapped ETH and remove ETH liquidity from the liquidity pool.
Binance has suspended ETH trading on the Arbitrum, Optimism and Ronin sidechains until the merger is complete.
There has been no word from a fellow lender and AAVE rival Compound Finance regarding the suspension of ETH withdrawals.
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