Why DeFi Protocols Limit ETH Borrowing Before Ethereum Merger


The upcoming merger – when Ethereum will undergo the most complicated upgrade in blockchain history – is already creating opportunities for those who predict it could have a positive impact on the price of ether (ETH). ETH, at around $1,600, is setting new yearly highs ahead of the event expected next week.

ETH is trading at its highest price against bitcoin (BTC) this year, and is also sucking oxygen from other layer 1 blockchains. At least part of the reason, analysts say, is the many tokens offered to be airdropped to ETH holders once the transition is complete – a free grant that people can choose to hold or sell.

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Several decentralized finance (DeFi) protocols are now setting limits on ETH lending, as speculators load up on the asset in anticipation of a potential windfall. Compound users, for example, voted today to set a borrowing cap of 100,000 ETH and raise interest rates for heavy borrowers.

“The next [Merge] has the potential to disrupt ETH lending markets due to the possibility of receiving ETH fork token airdrops. This may incentivize excessive borrowing from ETH lending pools, resulting in a negative user experience for depositors who cannot withdraw funds,” the proposal reads.

This comes a week after Aave, another “blue chip” DeFi lender, voted to temporarily ban ETH lending after users predicted the merger could cause a surge in demand that would severely interfere with programmatic trade protections. of the protocol.

See also: Aave Companies seeks $16 million from DAO to fund development

The risks for both protocols, Compound and Aave, and perhaps for other DeFi lenders, are similar: Airdrop speculators could suck up ETH deposits, creating liquidity constraints for other users. Indeed, other DeFi protocols see users trading ETH derivatives, such as Lido-staked ETH (stETH), which will not receive airdrops and is now trading at a steep discount, versus ETH, which will.

In Compound’s proposal, users note that “the vast majority of non-ETH assets are likely to become worthless on forkchains” – including perhaps the most eyed airdrop, ETHPOW – because it there is such a degree of consensus that change at the point of sale is beneficial. But short-term trading is attractive to many, and these alternative varieties of ETH could still hold value.

To some, such limits placed around “open finance” seem contrary to the goals of DeFi – an example of a group of people overriding the code intended to create fairer trading conditions for all. This is especially true given the concentration of DeFi voting among large token holders today.

See also: Compound Ether Token Market “Frozen” After Code Bug

But these precautionary measures could also prove the value and viability of distributed protocol governance, protecting the long-term health of DeFi against short-sighted and individually motivated traders. Either way, there are a million ways to trade fusion.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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