Breaking: Aave Stops Ethereum (ETH) Borrowing Ahead Of The Merge

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.

This may cause users to unwind their positions, which will further deviate the stETH/ETH peg. Therefore, increasing risks of additional liquidations and insolvency in the crypto market.

The snapshot vote also proposes to offer a one-time payment of 60 AAVE from the Aave treasury to the MakerDAO. It helps prevent proxy in relation to the proposal.

The snapshot voting has four options available for the Aave community. These include temporarily pausing ETH borrowing and paying 60 AAVE tokens, temporarily pausing ETH borrowing but deciding on payment in a different proposal, do not pause ETH borrowing, and abstain from voting.

Aave Supports Ethereum Merge, But Not ETHPoW

Aave DAO had passed a proposal to support the Ethereum PoS after the Merge and avoid any Ethereum fork such as ETHPoW.

Ethereum Merge is expected on September 15 as the Ethereum core developers and co-founder Vitalik Buterin confirmed earlier. The ETH price will become deflationary after the Merge.

Currently, the ETH price is trading at 1,664, up nearly 4% in the last 24 hours. The Bellatrix hard fork has been implemented successfully.