Degens borrowing ETH to get fork tokens creates headaches for DeFi platforms
The growing number of speculators taking out Ether (ETH) loans to maximize their potential to earn Ether Proof-of-Work (ETHPoW) tokens has caused headaches for decentralized finance protocols.
The issue has gained traction over the past month, as a significant number of Ether miners are expected to continue working on a forked PoW chain, or possibly even multiple chains after the long-awaited merger.
In the event of a fork, on-chain ETH holders, such as those using noncustodial wallets or those holding exchanges that support ETHPoW, will receive the equivalent amounts of the new tokens to their ETH holdings.
This is because your ETH balance on the existing chain will be duplicated on the forked PoW chain.
On September 6, Aave’s governance community voted overwhelmingly in favor of stopping ETH lending “in the interim pre-merger period.”
This proposal was originally put forward on August 24 following demand for Aave ETH loans reaching levels that were beginning to put pressure on the supply of liquidity.
Aave has a complex structure for issuing interest rates and uses algorithms to determine percentages taking into account liquidity and borrowing demand on the platform.
“Once the ETH borrow rate hits 5%, which happens shortly after a 70% utilization rate (we’re at 63% right now), stETH/ETH positions start to become unprofitable. “, read the August 24 proposal.
It was added that if these positions started to become unprofitable, users would likely rush to “unwind their positions until the ETH borrow rate returns to a stable level where the APY [Annual Percentage Yield] becomes tolerable. As such, this would put even more pressure on the ETH liquidity supply on Aave.
Yesterday’s vote received 77.87% for (528,290 people) and 22.13% against (150,170 people), and the proposal was carried out the same day.
Earlier this week, another DeFi lender Compound Finance also had a proposal related to Ethereum risk mitigation that passed, and notably had no votes against the 347,559 in favor.
Compound’s idea, which went into effect on September 5, was to set the borrowing cap at 100,000 ETH until the merger dust had settled.
Additionally, the protocol has updated its interest model to a “jump rate model with much higher rates after exceeding 80% loan utilization” which jumps to a maximum rate of 1000% APR if 100% utilization is achieved.
The hope is that this will deter users from overwhelming Compound with borrowing and withdrawing from the platform.
Proposition 122 prepares for the merger and a potential POW fork by protecting the liquidity of cETH users.
It imposes a borrowing cap of 100,000 ETH and introduces a new interest model with very high upper limits.
Voting starts in 2 days.https://t.co/7LvUk1lOk7https://t.co/krTBxFUQEe
— Compound Labs (@compoundfinance) September 2, 2022
Related: Hive Blockchain Explores New Minable Coins Ahead of Ethereum Merger
ETH outflows on exchanges
Users are certainly positioning themselves to get free tokens, despite many stablecoins and projects distancing themselves from a PoW chain.
The latest report from Delphi Digital notes that despite the recent decline in the price of ETH, exchanges saw outflows totaling 476,000 on August 29.
This is the third highest number of ETH withdrawals since March, and the company attributed it to Merge and investors repositioning themselves to collect ETHPoW tokens:
“To collect the most ETHPoW tokens, users likely withdraw ETH balances from centralized exchanges to non-custodial wallets, resulting in an increase in the net outflow of ETH from exchanges.”
While it’s unclear whether forked chains will generate strong enough interest to grow a sustainable ecosystem and community, in the short term, crypto degenerates seem at least eager to gobble up free forked tokens.