Might MakerDAO risk market decline due to Ethereum’s Merge

MakerDAO [MKR] has claimed that the much-anticipated Ethereum [ETH] Merge could do more harm than good to its network. 

Maker, the builder of the stablecoin – DAI – explained the implications of the Merge in a 22-tweet long thread on 5 July.

Responses:

• Confirm merge support from key external asset providers that interact with the Maker Protocol and services bridging DAI out to other chains.

22/

— Maker (@MakerDAO) August 5, 2022

Now, of course the Proof-of- Work (PoW) to Proof-of-Stake (PoS) transition was supposed to solve Ethereum’s scalability problems. However, MakerDAO claimed that the forked tokens could affect its system. Ergo, the question – How?

Not made enough

The protocol explained that the Merge could lead to perpetual contract backwardation and negative funding. Additionally, MakerDAO mentioned that the launch itself could trigger selling pressure across chains existing on PoW.

Another risk highlighted was the possibility of assets becoming worthless on already staked Ethereum (sETH). Maker considers this a big concern as it has operated lending protocols using the system. Additionally, it pointed out that lending protocols risk getting higher ETH deposit rates due to increasing liquidity owing to the fork merge.

Other factors considered include possible insolvency with liquidity pool protocols and stablecoins’ neglect as Tether [USDT] seems to be the only one in support of the Merge.

There’s also the potential of network downtime because not all Ethereum-based protocols would move to PoS with the Ethereum chain. In fact, Maker noted that this could affect users and transactions alike. Similarly, a replay attack on DAI-fork or MKR-fork was not left out of the options.

Maker went on to explain that the E1P-155 is not sufficient protection for it since it only functions on the PoW chain.

StarkNet can’t help?

Previously, Maker had announced that it was implementing a multi-chain strategy to foster faster withdrawals on StarkNet.

StarkNet is a permission-less decentralized ZK network, one that operates on an Ethereum Layer two (L2) network to achieve scalability. However, Maker stated it was deploying the chain to both the Layer one (L1) and L2 DAI systems. 

Maker continues to take steps toward the Multi Chain Strategy.

Governance has voted to deploy Fast Withdrawals on StarkNet with a new Debt Ceiling of 1 million DAI. pic.twitter.com/e2Ev0oiu6A

— Maker (@MakerDAO) August 5, 2022

Despite the deployment, the follow-up release could have proved that the StarkNet development was incapable of solving the potential challenges. Interestingly, Maker did not list out possible issues without matching them with proposed solutions.

Finally, Maker also noted that monitoring competitive rates across ETH protocols could help with the deposit rate challenge. Also, a possible liquidation ratio increase could pose as a solution to a likely volatility hike and liquidity risk.

With the Ethereum Merge fast approaching, investors may consider Maker’s concerns as legitimate. Furthermore, this might bring other protocols on the ETH chain up-to-speed about the likely implications of the PoS transition.