Why DeFi speculators are borrowing Ethereum as a merger looms

With Ethereum’s merge event Just days away, the entire industry is preparing for the most anticipated upgrade of the network.

Bounty hunters on Whatch out for any errors in the code; The blockchain company ConsenSys is release So called “sustainable” NFTs to mark the occasion; and encrypted exchanges make room Another potential fork of the Ethereum blockchain.

DeFi degens are also keeping a close eye on any potential fork. If that happens, it means that anyone holding ETH at the time of the fork will also earn another token airdropped to the new chain.

For those of you who were trading cryptocurrencies in 2017, you will remember that Bitcoin holders got access to Bitcoin Cash (BCH), Bitcoin Gold (BTG) and even something called Bitcoin Diamond (BCD) thanks to many of the original cryptocurrencies.

A well-known well-known Chinese miner Chandler Gu . is currently working lead the charge To get a Proof of Work fork of Ethereum. This is because after the merger, Ethereum will no longer need miners to sustain itself, leaving many mining operations in the open.

There is a lot at stake here.

As Guo tries to rally mining forces to implement the fork, Diggins is borrowing tons of ETH in hopes of also enjoying windfall gains from the fork (which will apparently carry the ETHPoW tick).

Borrowing has been so excessive that some protocols are taking steps to limit the amount that can be disbursed. Aave, the popular lending and borrowing protocol, is already done ETH Borrowing Paused Because of this huge demand.

As much as the return you earn on lending on Aave is a function of demand, interest rates for depositing Ethereum have also entered the double-digit territory. Currently, you can earn 10.54% on your ETH.

Instead of pausing borrowing, rival Compound protocol sets a cap of 100,000 ETH on how much users can borrow. The current proposal It also states that if the platform’s usage rate is 100% (i.e. some anticipation ), the cost of borrowing could go up to 1,000%.

Usage rate is a measure of it DeFi Protocols such as Aave and Compound are used to reflect the amount of assets in a given pool being loaned. A high utilization rate indicates that the demand for borrowing an asset is close to the total amount of said asset available.

Ciaran McPhee from 0xA Technologies put it Thus: “If I have a pool with $100 of Dai and $80 of those Dai being borrowed, that’s an 80% utilization rate.”

what’s the big deal? In the free market for cryptocurrencies, the high demand will be met equally by attractive rates on the supply side, right?

While this is certainly true, high usage rates can still pose two major problems.

First of all, once 100% of all funds in the pool are used, depositors will not be able to withdraw their funds from the system. Second, the high usage rate can cause filtering issues for these platforms. When there is no collateral in the system because it is all borrowed, liquidators will not be able to close certain positions, which could leave the protocol without collateral (which is just a fancy way of saying insolvency). And that would be really bad.

Finally, the thing to remind Ethereum borrowers is that none of these platforms will contact you and tell you that the cost of borrowing has just gone up 1,000%. It will happen.

And if you’re borrowing specifically to speculate on the possibility of an airdrop in the event of a network split, you’re also betting that this new token will rise as well. If it doesn’t, you are in a world of pain.

Good luck there.

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