Why DeFi Protocols Limit Ethereum Lending?

Why DeFi Protocols Limit Ethereum Lending?

Aave, the DeFi giant, stops borrowing Ethereum

Aave has a large decentralized lending platform statement of new rules to protect against various risks that may arise due to a rise in demand for Ether (ETH) loans from crypto traders betting on the upcoming Ethereum blockchain technology overhaul.

Between August 30 and September 2, the Aave community voted, with a landslide victory, to stop lending Ether, setting aside the free market principle of democratized finance to reduce global risk. -Stake (PoS) consensus mechanism from Proof-of-Work (PoW) mechanism, called fusion. The update is scheduled between 13 and 15 September .

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According to the proposal put forward by the research firm Block Analitica “As the Ethereum merger approaches, there is a risk of high usage in the ETH market before the Aave protocol. Temporarily pausing ETH lending will reduce this risk of high usage.”

High usage makes liquidations difficult

Due to a spike in the usage rate, most of the ETH was ready, and little was reserved for liquidators as collateral to process regular job liquidations based on borrowing ETH. Block Analiica said in the proposal:

“High utilization affects liquidated transactions, increasing the chance of protocol insolvency.”

Calling the lending stop a good move, Ian Solot, partner at crypto hedge fund Tagus Capital, said: “Part of the problem is if markets become very volatile and borrowers need to liquidate ETH, there could be ETH shortage due. high usage, making it more difficult to perform liquidations effectively.”

Ethereum proof mechanism

With this update, Ethereum will pick up under PoS where the PoW (Proof-of-Work) chain left off, and all assets are preserved. However, the original PoW chain will not cease to exist and all assets will be preserved there as well.

Although the value of the assets on the PoW chain should quickly drop to zero, some authorized traders believe that the remaining ETH on the original chain (ETHW) will have some value, even if only a fraction of that is “real” ETH.

In addition, the original forum post suggested a one-time payment of 60 AAVE to be transferred from the Aave fund to the MakerDAO break proxy for the proposed ETH lending break.

While speculators seek to maximize their pre-merger exposure to ETH by borrowing, DeFi lending protocols such as Aave and Compound anticipate problems and are taking steps to reduce them. As ETH loan usage approaches capacity, depositors may not be able to withdraw their funds. Ending ether lending could therefore have an impact on the health of the protocols, so the lack of ETH could affect the liquidation of the ETH-guaranteed position chain.

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