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Aave and Compound Forced to Take Action Amid Rising Ether (ETH) Lending

The Merge is coming soon to the Ethereum (ETH) blockchain, and many users are borrowing Ether to try and get free tokens on the forked Proof-of-Work (PoW) version. This is why certain protocols like Aave or Compound must take measures to limit possible instabilities due to these massive loans.

Aave and Compound Forced to Take Action Amid Rising Ether (ETH) Lending

Aave temporarily suspends Ether lending

With the upcoming arrival of The Merge update of the Ethereum blockchain (ETH) and the possibility of a fork of the latter, a growing number of Ether loans are performed on different platforms. Indeed, with the fork, some individuals hope to benefit from a significant number of ETHPoW tokens for free, although the project overall receives rather mixed support from the ecosystem.

However, such a rise in Ether lending is not without consequences. This is why the decentralized finance protocol (DeFi) Aave was forced to make a governance proposal in order to put ETH lending temporarily on hold in order to avoid too great instabilities on the protocol, as we can read on the relative page:

“High usage interferes with liquidation transactions, increasing the chances of protocol insolvency. Additionally, a high ETH borrowing rate can make recursive stETH/ETH positions unprofitable, increasing the chances of users unwinding their positions and further deflecting the price of stETH/ETH, causing additional liquidations and lending. ‘insolvency. »

The proposal was overwhelmingly accepted by the Aave governance community, with 77.87% of votes in favor and 22.13% of votes against. A decision that should logically protect the market, a depeg of stETH could cause a wave of liquidations, as advanced by the author of the proposal via this graph:

stETH Clearance

Risks of liquidation of positions exposed to stETH

As we can see, a 15% depeg could result in more than $22 million in liquidations. In a scenario where the depeg reaches 50%, the amount of liquidations would exceed $500 million. More details on the risks induced by these waves of loans are available in the original proposal.

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Compound is also taking some action

Compoundanother major player in decentralized finance, has also taken action through its governance system.

A proposal issued on September 2 was actually tabled, in particular in order to limit Ether lending to a maximum of 100,000 ETHalways in order to limit the risks of loans from the second most capitalized cryptocurrency on the market, in which we can read:

“This can incentivize excessive borrowing from ETH lending pools, leading to a negative experience for depositors who cannot withdraw their funds when usage reaches 100%, as well as security issues due to the risk of interference with the liquidations of positions guaranteed by ETH. The proposed changes should help reduce the risk of the ETH market reaching 100% utilization. »

The ongoing voting process, which has so far collected 100% of votes in favorwill last until tomorrow morning.

Sources: Aave, Compound