Degens borrowing ETH to get fork tokens create headaches for DeFi platforms
The growing number of speculators taking out Ether (ETH) loans to maximize their potential to earn forked Ether Proof-of-Work tokens (ETHPoW) has been causing headaches for decentralized finance protocols.
The issue has been gaining traction over the past month or so, given that a significant number of Ether miners are expected to continue working on a forked PoW chain, or possibly even multiple chains post the long awaited Merge.
In the event of a fork, on-chain ETH hodlers such as those using non-custodial wallets or those holding on exchanges that are supporting ETHPoW will be airdropped the equivalent amounts of the new tokens to their ETH holdings.
This is because your ETH balance on the existing chain will be duplicated on the forked PoW chain.
On Sept. 6, the Aave governance community overwhelmingly voted in favor of halting ETH lending “in the interim period leading up to the Merge.”
This proposal was initially put forward on Aug. 24 as result of the demand for Aave ETH loans surging to levels that were starting to put pressure on the liquidity supply.
Aave has a complex structure for issuing interest rates, and utilizes algorithms to determine percentages taking into account the liquidity and demand for borrowing on the platform.
“Once the ETH borrow rate reaches 5%, which happens shortly after 70% utilization rate (we are at 63% right now), stETH/ETH positions start becoming unprofitable,” the proposal stated as of Aug. 24.
It was added that if these positions do start to become unprofitable, users would likely race to “unwind their positions up until the ETH borrow rate reverts to a stable level where the APY [Annual Percentage Yield] becomes tolerable.” As such, this would put even more pressure on liquidity
Read more on cointelegraph.com
