Aave suspends Ethereum loan ahead of Merge

Decentralized lending platform Aave has halted lending Ethereum (ETH) loans to users. The development manifested after the Aave community voted to stop the loaning of ETH. The poll ran from August 30 to September 2, as the community put aside the principle of a democratized finance free market to mitigate protocol-wide dangers that are attached to the Ethereum merge. 

The Ethereum merge is a significant occurrence that has gained notable attention in crypto. The merge refers to Ethereum’s incoming switch from a proof-of-work (PoW) consensus mechanism to a proof-of-stake consensus mechanism. Generally, the crypto space anticipates the merger that’s expected to take place between September 13 to September 15. 

According to popular crypto analytical firm Block Analytica, Aave is facing a danger of enormous utilization in the Ethereum market ahead of the Merge. Utilization rate implies the rate of pool loaned out. Strong speculations are that the rate would rise if users borrowed more Ethereum before the merge. The loan will come as free funds from the transition. 

Expert’s opinion on the situation

Ahead of the merge, these speculations further indicate some Ethereum miners are contemplating dividing the chain into a combination of Proof-of-Stake and Proof-of-work chains. The PoW chain would adopt ETHPOW as its native token; after the conclusion of the merge, thereby allowing ETH holders to receive ETHPOW for free. Currently, experts in the industry are skeptical about the effect of mergers on loaning protocols. 

One of the experts of Binance.US remarked that there is an increase in borrowing ETH from Aave and other lending protocols. Another expert, Bobby Ong, working with CoinGecko, opined that if the trend proceeds, the current utilization rate could skyrocket to about 100% from 70%. According to Ong, the increment in the utilization rate would cause the loaning out of the venous ETH pool, leaving a minimal amount as liquidation as collateral. 

Popular crypto analytical firm Block Analitica divulged that high utilization interacts with liquidation transactions. These transactions often hike the possibility of insolvency for the protocol. Also, a league of experts has applauded the development, while some have rained heavy criticism. One of the critics of the innovation, Ian Solot, said there could be a problem.

If the market witnesses a volatile situation and ETH borrowers need liquidation. He added that there might be limited ETH availability due to the growing utilization. Therefore making it difficult for liquidations to go through effectively. 

As the Ethereum merger draws closer, subsequent development is expected to hit the crypto space. Currently, the crypto space remains in limbo concerning the consequences of the merger.

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