DeFi degens borrow ETH in hopes of being airdropped a brand new coin if there is a fork following the merger. Pools are now limiting borrowing. The merger event of Ethereum is just days away and the whole industry is gearing up for the most anticipated upgrade.
Bounty hunters are on the lookout to find any bugs in the code. ConsenSys, a blockchain company, is launching “sustainable” NFTs to mark the occasion. Crypto exchanges are clearing the way for another possible fork of Ethereum’s blockchain.
A Potential fork means holders could get airdropped new coins
If you were trading crypto in 2017, you will recall that Bitcoin Cash (BCH), Bitcoin Gold(BTG) and even Bitcoin Diamond (BCD), were available to holders thanks to different forks of the original cryptocurrency.
Chandler Guo, a well-known Chinese cryptominer, is currently leading a charge to create an Ethereum proof-ofwork fork. Because Ethereum won’t need to run its own mining machines after the merger, many mining operations will be left behind.
Guo tries to get the mining troops to execute the fork. Meanwhile, degens borrow tons of ETH to try to also enjoy a windfall from the forked coin (which will reportedly carry the ticker ETHPoW).
Some protocols have taken steps to limit the amount of borrowing that can be done. Due to this huge demand, Aave, a popular lending and borrowing protocol has stopped ETH borrowing
Insofar that the Aave yield and demand are both a function of supply, depositing Ethereum has seen interest rates rise to double-digit levels. You can currently earn 10.54% on Ethereum.
Ethereum DeFi pool cap ETH borrowing
Compound, a rival protocol, has set a cap of 100,000 ETH on the amount users can borrow. The current proposal states that if the platform’s usage rate reaches 100% (which some expect to happen), then the borrowing cost could go up to 1,000%.
DeFi protocols such as Aave or Compound use the utilization rate to indicate how much an asset is being lent. High utilization rates indicate that there is a high demand for an asset to be borrowed.
Ciaran McVeigh, 0xA Technology stated it this way: “If I have a pool of $100 worth of Dai and $80 have been borrowed that would represent a utilization rate 80%.”
What’s the big deal? What’s the big deal? In the crypto free market, the high demand side will also be met by the attractive supply rates.
High utilization rates can pose two main problems, even though it’s true.
First, once 100% of funds in a pool have been used, depositors will not be able withdraw their money from the system. These platforms can also be affected by high utilization rates, which can lead to liquidation problems. Liquidators will not be able close certain positions if there is no collateral in the system, as it is all borrowed. This is a fancy way to say that the protocol is under-collateralized. That would be terrible.
Last but not least, Ethereum borrowers need to remember that none of these platforms will call you and tell you that your borrowing costs have jumped to 1,000%. It will happen.
If you are borrowing to speculate on an airdrop should the network fork then you also bet that the new token will skyrocket. You’re in for a lot of pain if it doesn’t.