Aave Puts a Halt on Ethereum Borrowing While Awaiting the Merge

Aave Puts a Halt on Ethereum Borrowing While Awaiting the Merge

August 30, 2022 0 By Jeanine Sanchez

It is said that the Aave community is about to embark on a new vote to put a hold on Ethereum borrowing till the expected merge has been concluded. The decentralized finance platform thinks the upcoming PoS protocol will encounter a big utility risk in the market as a result of possible hard forks of the Ethereum network.

Trying to Prevent Losses

Aave is a decentralized finance lending and borrowing platform and it decided to temporarily halt Ethereum borrowing. The platform wants to mitigate risks the Merge might have in the market. Voting to make a final and community-based decision will commence on the 30th of August and end on the 2nd of September.

According to Aave, the proof-of-stake protocol has a risk of underutilization in the Ethereum community because of the possibility of a parallel Ethereum token. There are developers who are working to hard fork the current Ethereum PoW so there can be a token based on it. Putting a hold on borrowing ETH on the platform will reduce risks.

It is envisaged that users might want to take advantage of the to-be newly forked Ethereum proof-of-work by borrowing some Ethereum before the merger is done. This will then create a utilization risk in the market. The utilization risks that ensue will have an impact on liquidity as it will increase Aave’s insolvency risks.

Importantly, high Ethereum borrowing could have an impact on staked Ethereum and its recursive borrowing position on the platform. In the case of recursive borrowing, investors in decentralized finance stake the Ethereum and receive stETH which they would deposit as collateral on any lending pool like Aave. 

They would then be able to borrow Ethereum again in return for stETH and continue in that circle. Up to $907 million worth of stETH is currently collateralized on Aave for ETH borrowing.

Options in the Vote

The latest development Aave is taking on might cause users to revisit their positions and it might deviate from the stETH peg even further. It will then increase the risks of further insolvency and liquidation in the crypto market. 

The vote equally made a proposal to give 60 AAVE in payment just once to Maker DAO from the platform’s treasury. This helps to do away with proxies where the proposal is concerned.

There are four options available for voting for the community. These options are: to pause borrowing Ethereum on the platform for a while and pay 60 AAVE; putting a hold on Ethereum borrowing and deciding payment through a different offer.

The other two options are: not to put a hold on Ethereum borrowing; to stay away from the vote.

Aave DAO put out a proposal that would help it support Ethereum once the Merge is done and prevent any hard fork of Ethereum.