Will Aave’s resolve to halt Ethereum loans be a successful rescue mission
Open-source liquidity protocol, Aave [AAVE] resolved to stop loaning Ethereum [ETH] ahead of the fast-approaching Merge. A vote was held between 30 August and 2 September for the same. A large number of the community supported the suspension.
On 23 August, Block Analitica, a Defi research, and analysis company led the Aave community in proposing the motion for stopping the loans.
The digital assets research organization had given supporting reasons. And, these reasons have the most concerning aftereffects of opening lending before and during the Merge.
Block Analitica had highlighted excessive ETH borrowing and the staked Ethereum [stETH] collateralization as cogent excuses to take immediate action.
Furthermore, the notion that not all DeFi protocols excluding Aave and Compound will get a slice of the ETH Proof-of-Work (PoW) tokens had contributed to the FOMO the proposal noted. Block Analitica stated,
“Speculative strategies related to the PoS merge and the potential ETHPoW fork will likely have implications for Aave, particularly because Aave enables ETH to be borrowed from stETH.”
In addition, the proposal also mentioned three major risks that could be the outcome if the decision had not been taken. Talks of liquidity providers withdrawing their ETH, negative stETH positions, and liquidity challenges were mentioned.
Events following the approval seem to have justified the fear of the Aave community. On 5 September, CoinGecko’s co-founder, Booby Ong tweeted that it made sense to borrow as much ETH on Aave or Compound. He also pointed out the stETH market on Aave or Lido Finance as one way to potentially profit from the Merge.
Additionally, a Binance U.S. research specialist noted that there has been increased ETH flowing
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