Aave community is set to vote on a new proposal to pause Ethereum (ETH) borrowing until the Merge. The DeFi platform Aave believes the protocol faces high utilization risks in the ETH market due to the controversial Ethereum hard fork proposal ETHPoW.
Aave Proposal to Pause ETH Borrowing Until the Merge
The DeFi lending and borrowing protocol Aave has announced the proposal “Temporarily Pause ETH Borrowing” to stop Ethereum borrowing on Aave until the Merge. The voting on the proposal starts today, Aug 30, 2022, and ends on September 2.
Aave considers the protocol faces risks of high utilization in the ETH market due to the ETHPoW hard fork. Thus, pausing the ETH borrowing on the protocol will better mitigate the risk.
Users may take advantage of the forked Ethereum PoW token (ETHW) by borrowing ETH before the merge. Therefore, creating a risk of high utilization in the ETH market before the Merge. The high utilization will impact liquidation transactions, increasing insolvency risks for Aave.
Moreover, a high ETH borrowing can impact the stETH/ETH recursive borrowing positions on Aave. In recursive borrowing, DeFi investors staked their ETH and get stETH, then they deposit the stETH as collateral on a lending protocol such as Aave to borrow more ETH and get more stETH, and the cycle continues. Currently, about $907 million in stETH is collateralized for ETH borrowing on Aave.
