Ethereum Merge Could Affect Stablecoins and DeFi Protocols

Ethereum Merge Could Affect Stablecoins and DeFi Protocols

A merger with the support of the giants

The upcoming Ethereum merger could have a significant impact on how DeFi protocols work on top of crypto’s most popular decentralized finance chain, according to a new report from DappRadar.

Major stablecoin issuers like Tether (USDT) and Circle (USDC) have already revealed their support for the merger. However, some members of the community are concerned about this planned migration.

Currently, USDC is the largest dollar-backed coin issued on Ethereum and the largest ERC-20 asset overall, with more than $45 billion in market capitalization residing in the ecosystem at the time of publication. Its reserves are audited and held in US financial institutions such as BlackRock.

Coinbase says it will “look into possible forks” after the Merger.

Following the announcement of support from Circle, the issuer of the USDC token, Tether – the issuer of the world’s largest stablecoin, USDT – has confirmed its support for the upcoming Ethereum merger. He said that joining the merger was essential to avoid any disruption to the public when using his tokens on DeFi platforms.

Potential problems of the merger

The study focuses on the delays that may occur as Ethereum transitions to a proof-of-concept consensus mechanism, commonly known as Merge. The long-awaited (and often delayed) technology upgrade could slow down transaction times or create service outages in DeFi lending protocols, creating headaches for platforms, according to the report . In turn, this could reduce the value of stables and reduce DeFi lending pools.

Binance will stop ETH and ERC-20 deposits and withdrawals during the Merger.

For example, stablecoins are often one of the assets in a digital asset pair used in “automated market maker” or “MMA” setups.

AMM is designed to create liquidity for others who want to transact. As another example, stable gold coins are often “locked” in DeFi contracts to earn a return from interest payments made by other borrowers on those stable gold coins as part of the contract for leveraged trading or other activities.

Although unverified, industry metrics for the importance of DeFi participation include the percentage of stablecoins that are “locked” in Ethereum smart contracts. Ethereum is currently the largest blockchain on which DeFi protocols and applications run.

Several voices highlight the many problems

MakerDAO, the creator of DAI, which is one of the largest decentralized stablecoins on Ethereum, highlighted several issues which may arise during the Ethereum merger. One of the points is related to steETH.

“stETH will likely lose all value during the Ethereum PoW fork.

Indeed, additional chain upgrades would be required to unlock the pledged ETH from the deposit contract, and it could be argued that there is little economic incentive for the chain to adapt to this situation. »

He then added:

“Therefore, the market price of pledged liquid assets may decrease depending on the expected value of the ETH PoW fork. This could happen due to direct sales of stETH for ETH, or from leveraged short positions. »

3 Strategies Investors Could Use to Speculate on the Next Ethereum Merger.

The Merger is certainly one of the most anticipated events of recent years by the crypto community, feared by some and celebrated by others. It is likely that there will be a rather complex transition period which could destabilize the market.

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