The long-awaited Ethereum merge is just four days away. ConsenSys, a Blockchain company, plans to celebrate the occasion by launching a ‘Sustainable’ Non-fungible token expected on the event day. Crypto exchanges are also preparing for a potential fork of the ETH blockchain.
Moreover, DeFi degens are anticipating a possible fork. If it happens, any ETH holder during this fork would be airdropped a token for the new blockchain.
The same happened five years ago when BTC holders received airdropped Tokens of Bitcoin Gold and Bitcoin Cash from forks of the original crypto. Chandler Guo, a crypto miner from China, is currently leading the charge for an ETH Proof-of-work fork since mining machines won’t be of use in the new ETH blockchain after the merge.
It gets interesting because, while Guo is attempting to rally other miners to execute their fork, degens are also borrowing Ethereum hoping to receive an airdropped token.
ETH borrowing Demand Surges
Reports indicate that ETH borrowing has been rampant leading DeFi protocols to limit the amount users can borrow. A famous borrowing and lending DeFi, Aave, temporarily stopped ETH borrowing due to increased demand.
Interest rates for lending have also shot up on Aave. The lenders are earning between 10%-10.5% on their ETH. On the other hand, Aave’s main competitor, Compound, did not pause borrowing but instead resolved to put a 99,999 ETH cap as the maximum the users can borrow.
Some experts anticipate that the utilization rate could reach 100%. The Current proposal states that the cost of borrowing could go up to 1000% if a lending and borrowing protocol’s utilization rate reaches 100%.
Aave and Compound use the Utilization rate to determine how much of a given asset in a pool is being lent out by users. The higher the utilization rate, the closer the asset borrowing demand gets to the total amount of said asset available.
High Utilization Rates Pose Threats to DeFi Protocols
High utilization rates result in two problems. First of all, once 100% of all the money in a given pool is in use, it becomes impossible for depositors to withdraw funds from the system.
Secondly, high utilization rates are likely to result in the liquidation of the Defi protocols. Considering all funds are borrowed, collateral won’t be available in the system. Thus, liquidators won’t close certain positions, deeming the protocol insolvent.
All ETH borrowers need to note that the lending and borrowing platforms do not notify their users that the cost of borrowing has risen to 1000%. It just catches you off guard.