High ETH Borrowing From DeFi Lending Protocols Ahead The Merge

High ETH Borrowing From DeFi Lending Protocols Ahead The Merge

Before the historic The Merge event, which transformed Ethereum's Proof-of-Work (PoW) consensus method into a consensus mechanism in general and the crypto market in particular. Speculators borrowing Ethereum (ETH) on PoS (Proof-of-Stake) decentralized lending platforms increased significantly as they anticipated receiving an airdrop of Ether Proof-of-Work (ETHPoW) tokens. After The Merge, ETH is scheduled to be paid out in this token. Even though it is unclear whether the fork will occur or whether the fork token will have any value, investors have continued to hold ETH in the goal of receiving a token refund despite the uncertainty. after The Merge and will use the airdrop they receive to sell for a profit.

Before the airdrop, lending platforms adopted a number of strategies to lessen market disturbance caused by increased borrowing activity. Let's look at how these typical lending platforms operate below.


On September 6, prior to The Merge, The Aave Governing Community agreed to suspend lending ETH, with 528,290 voting in favor and 150,170 voting against. This proposition was first put up on August 24 in response to a strong rise in demand for ETH loans on the Aave platform, which put pressure on the platform's liquidity supply and exposed dangers like poor liquidity, a negative APY, and significant ETH withdrawals.

USD Inflows in Aave over 30 days
USD Inflows in Aave over 30 days

The aforementioned graph shows that on August 31, with $262 million, the money flow into the Aave platform rose significantly. However, we can observe that there has been no inflow but only withdrawals since September 6th, when the scheduled termination of ETH lending was announced.


By establishing a way of limiting loans and hiking interest rates, Compound, unlike Aave, has a different strategy to decrease the over-borrowing of ETH by speculators. Compound's voting proposal receives 100% support from users, with 347,559 votes in favor.

With an APR of 2% at 0% loan utilization and 20% APR at ideal loan utilization, Compound specifically implements an interest rate rise model by determining an interest rate dependent on loan usage. and APR of 1,000% at 100% loan usage, where 80% is the ideal level.

USD Inflows in Compound over 30 days
USD Inflows in Compound over 30 days

As can be seen from the chart above, the cash flow into the Compound platform has gradually decreased since August 31 when the policies were announced. Following the official proposal's launch on September 7, Compound withdrew a sizable amount of cash from the platform—up to 147 million USD. This could be the outcome of Compound's suggestion to raise interest rates; high interest rates discourage potential borrowers, and fewer borrowers will lower demand and boost supply, producing the desired outcome. Money left the country at a rapid rate.


September 7, Michael Bentley, Euler Labs's CEO, offers a radically different proposition than that of Aave and Compound, which is to do nothing.

USD Inflows in Euler over 30 days
USD Inflows in Euler over 30 days

Bentley goes on to say that Euler won't alter the platform's interest rate model for Ethereum (ETH) and will permit borrowers to amass Ethereum (ETH) in the days preceding The Merge while also allowing providers of liquidity to meet that Ethereum demand. Bentley continued by saying that by putting this suggestion into action, Euler might entice lenders with high interest rates by offering liquidity to draw additional money into Euler. This is seen by the cash flow diagram below.


According to the author, the aforementioned information shows how appealing Ethereum's value in general and The Merge event in particular are to investors. Speculators are still hoping to get the token airdrop when the changeover is complete, even though there is no indication that there will be a token fork after The Merge. However, this also has implications for decentralized lending platforms because it will result in liquidity issues that will affect prices when demand is too high but supply is too low. a market imbalance exists. Decentralized lending platforms employ the aforementioned rules to discourage speculation, but they also have to give up some of their users in the process.

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