Degens Cause Trouble to DeFi; ETH Loans Pressurize Liquidity

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  • Speculators amassed ETH loans to attain forked ETH Proof-of-Work tokens.
  • The increased number of loan borrowers inflicted trouble on DeFi platforms.
  • Considering the pressure on liquidity supply, Aave proposed stopping ETH lending the loans.

Reportedly, the increasing number of speculators amassing ETH loans for the purpose of acquiring forked Ether Proof-of-Work (ETHPoW) tokens has inflicted complications for DeFi platforms.

As there was an assurance that the ETH balance in the existing wallet of the holder would be duplicated on the forked PoW chain, a large number of Ether miners were expected to engage on a forked PoW chain or even multiple chains, after the much-awaited Ethereum Merge.

On August 24, and later on September 6, the Aave governance community took the initiative to put forward a proposal to stop ETH lending “within the interim interval of as much as the Merge,” as the rising level of ETH loans began to pressure the liquidity supply.

The description by research firm Block Analitica reads:

Ahead of the Ethereum Merge, the Aave protocol faces the risk of high utilization in the ETH market. Temporarily pausing ETH borrowing will mitigate this risk of high utilization.

It was anticipated that ETH-stETH recursive borrowing positions on Aave could become unprofitable due to the rise in the borrowing rate of Ether, thus injecting volatility into the stETH market.

According to the proposal on August 24,

As soon as the ETH borrow price reaches 5%, which occurs shortly after 70% utilization price (we’re at 63% proper now), stETH/ETH positions begin turning into unprofitable.

In addition, Aave informed the borrowers, of the unique and complicated loan structure, which uses algorithms to determine the interest percentages and verify the liquidity and demand for loans. During the last day’s election on the issue, 77.87% of votes were polled in favor of the argument and 22.13% against it. As a result, the proposal was executed on the same day.

Similarly, in the same week, there was another DeFi lender, Compound Finance, that came forward with the same forked Ethereum de-risking proposal for which there were no votes against and 347,559 in favor. 

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