fusional crisis – The Aave community agrees on pausing Ether (ETH) lending, to prevent a catastrophe, which an Ethereum fork and market greed could cause as The Merge approaches.
Suspension of ether loans on Aave: user greed crisis?
The merger will therefore lead to a suspension. The proposal to pause ETH borrowing on the Aave protocol, as The Merge approaches, received the support of almost 78% of the votes. The election, which took place from August 31 to September 2, therefore obtained the support of an overwhelming majority.
The research firm Block Analiticawho had put forward this proposal, stresses that this suspension of loans is a means to mitigate the risk of heavy use of the protocol in ETH markets, as Ethereum’s switch from proof-of-work to proof-of-stake approaches.
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Free ETHPOWs: possible cause of a liquidity crisis on Aave
The probability of a fork following The Merge increases the market’s appetite for Ether, before this major event which should take place from September 13 to 15.
In the event of a schism led by miners who disagree with this upgrade, the ETHPoW, which is the ETH blockchain continuing to operate with proof-of-stake, will distribute ETHPOW cryptocurrency for free to ether holders.
This possible ETHPOW airdrop can thus push the markets to stock up on ethers, by borrowing from Aave. Such greed could then cause a liquidity crisisand all the resulting negative consequences, if Aave does not take the necessary measures.
Ethereum: explosion of interest rates for ether loans and insolvency
In detail, the increase in demand in terms of ETH loans poses a risk of insolvency, on investors who mobilize a strategy of recursive transactions.
These investors deposit their ether in the Lido liquid staking protocol. They lock their assets there to generate remunerative interest, and to receive in exchange the stETH token, which can be deposited again as collateral on Aave to have other ethers. These ethers will then also be staked in Lido to obtain stETH in return, and the loop starts again.
However, this recursive strategy is only interesting when the borrowing rate on Aave remains below a certain threshold, defined by the remunerative rate of staking on Lido.
An increase in the rate of using Aave to borrow ethers would increase significantly this borrowing rate, and investors who have engaged in these recursive transactions, risk incurring losses and ultimately being unable to repay a large portion of their borrowings.
Major crypto protocols cannot remain passive in the face of The Merge and the tremors it entails. Aave suspends ether lending. Binance has paused ETH deposits and withdrawals on certain networks since September 6.
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