The Aave (AAVE/USD) community has voted to temporarily pause Ethereum (ETH) borrowing on the decentralised finance (DeFi) protocol ahead of the Ethereum Merge slated for mid-September.
This is after more than 96% of the community agreed with a risk assessment report and improvement proposal first highlighted on 23 August 2022.
In the Aave ETHPoW Fork Risk Mitigation Plan report, the Aave team said that research platform Block Analitica had identified probable risks with regard to borrowing ETH on the Aave protocol on Ethereum.
Why freeze ETH borrowing?
Per the proposal, Block Analitica had highlighted that potential for increased borrowing in the Ether market as investors look to benefit from forked proof-of-work ether (PoW ETH, or ETHW), heavy borrowing amid over-utilization could pose a risk.
“Ahead of the Ethereum Merge, the Aave protocol faces the risk of high utilisation in the ETH market. Temporarily pausing ETH borrowing will mitigate this risk of high utilisation.”
According to the protocol, high utilisation will interfere with the network’s liquidation transactions, an eventuality that would increase the odds of an insolvency for Aave.
Also important is that having high borrowing of the Ethereum token could lead to stETH/ETH recursive positions becoming unprofitable. The scenario would increase the chances of users unwinding their positions and triggering further price deviations for stETH/ETH – adding to the pressures of liquidations and insolvency.
The proposal passed with 96.1% of the community vote, with 60 AAVE paid to the Block Analitica as compensation for its input.
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