Aave community proposes to temporarily suspend ETH lending before the Merge

With the Ethereum Merge on the way, the risk research and analysis team Block Analitica proposed a temporary pause in Ether (ETH) borrowing to mitigate the risks that may lead to a decentralized finance (DeFi) implosion in the Aave lending protocol during the Merge.

The team pointed out the potential issue of high ETH utilization, which may result in liquidations being hard or impossible and annual percentage yields (APYs) reaching negative figures. Furthermore, the uncertainties surrounding the Merge and a potential Ethereum proof-of-work (PoW) fork may cause liquidity providers to start a bank run, pushing utilization to even higher levels.

Block Analitica proposed several solutions, including a temporary halt for ETH lending on the Aave platform and increasing the variable borrow annual percentage rate (APR) at 100% utilization from 103% to 1,000%.

In response to the proposal, the market risk assessment team Gauntlet network expressed support for tpausing of ETH borrowing. However, they suggested breaking up the proposal into two parts and conducting more analysis regarding the second solution presented by Block Analitica.

In the end, community members initiated the vote to approve pausing ETH borrowing on the Aave platform. The vote will begin on Aug. 30, 2022, and end on Sept. 2, 2022. With this, community members can choose whether they agree to pause lending.

Apart from DeFi platforms, centralized exchanges have also expressed concerns and put up countermeasures for the possible implications of the upcoming Ethereum merge. Crypto exchange Binance announced last week that they will pause ETH and ERC-20 token withdrawals to provide stability during the Merge.

Meanwhile, digital asset platform Coinbase said that it will be reviewing any potential forks that may come out of the upcoming ETH Merge. According to the firm, the assets will be reviewed in a manner simto that o any other asset that trades within its exchange.