Borrowing from AAVE

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Degens obtaining fork tokens by borrowing ETH causes issues for DeFi sites

Borrowing from AAVE
Borrowing from AAVE / Image Credit: CRYPKYP
1662540609 07 Sep / 08:50

Decentralized finance (DeFi) protocols have been troubled by the rising number of speculators taking out Ether (ETH) loans to increase their chances of earning forked Ether proof-of-work tokens (ETHPoW).

Given that many Ether miners are anticipated to continue mining on a forked PoW chain or potentially even numerous chains after the much-anticipated Merge, the problem has gained steam over the past month or two.

The comparable amounts of the new tokens will be airdropped to on-chain ETH hodlers who are using noncustodial wallets or who are holding on exchanges that enable ETHPoW in the case of a fork.

The forked PoW chain will copy your ETH balance from the original chain.

Tuesday saw a resounding vote by the Aave governance community to prohibit ETH lending “in the interim period leading up to the Merge.”

This suggestion was first put up on August 24 in response to the surge in demand for Aave ETH loans, which was beginning to put pressure on the liquidity supply.

Aave uses algorithms to calculate percentages while considering the platform’s liquidity and demand for borrowing. It features a complicated framework for generating interest rates.

According to the plan, as of August 24, “stETH/ETH trades start becoming unprofitable whenever the ETH borrow rate approaches 5%, shortly after 70% usage rate (we are now at 63%).”

Users would probably rush to “unwind their positions up until the ETH borrow rate reverts to a steady level where the APY [Annual Percentage Yield] becomes reasonable,” it was stated, if these positions did begin to become unprofitable. As a result, the liquidity supply of ETH on Aave would be put under even greater strain.

Voters yesterday approved the measure with 77.87% of the vote (528,290) to 22.13% of the vote (150,170), which was put into effect the same day.

Another DeFi lender, Compound Finance, had a request earlier this week relating to forking Ethereum risk reduction that was approved with 0 votes against and 347,559 in favor.

The plan proposed by Compound, which became operational on Monday, was to limit borrowing to a maximum of 100,000 ETH while the Merge’s effects were still being felt.

The protocol has also changed its interest model to a “jump rate model with substantially higher rates after achieving 80% borrow utilization,” which bumps to a maximum rate of 1000% APR if 100% utilization is attained.

It is hoped that this will discourage users from using Compound excessively for borrowing and withdrawals.

Even though many stablecoins and organizations have distanced themselves from a PoW chain, users are undoubtedly positioning themselves to receive free tokens.

According to the most recent report from Delphi Digital, exchanges had outflows of 476,000 on August 29 despite the recent decline in the price of ETH.

The company attributed the third-highest quantity of ETH withdrawals since March to investors and Merge repositioning to gather ETHPoW tokens:

Users are probably moving their ETH balances from centralized exchanges to noncustodial wallets to obtain the greatest number of ETHPoW tokens, increasing the net outflow of ETH from exchanges.

Even though it is uncertain whether the forked chains will generate sufficient interest to create a long-lasting ecosystem and community, in the near term, crypto degens at least appear eager to snatch up free forked coins.

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