Aave has stopped lending ETH until the merge has been completed, whereas Compound Finance has chosen to cap the number of loans and implement a jump interest rate scheme.
Since forked Ether proof-of-work tokens, ETHPoW (1) has been generating problems for decentralized finance DeFi protocols; an increasing number of speculators are taking out Ether ETH loans to increase their chances of obtaining them. Given that many Ether miners (2) are anticipated to continue mining on a forked PoW chain or possibly even numerous chains after the eagerly anticipated Merge, the subject has gained significant traction over the past few months.
On-chain ETH holders who use non-custodial wallets or who own exchanges that allow ETHPoW will receive airdrops of new tokens corresponding to their ETH holdings in the event of the fork. This is because the ETH balance on the original chain will also be present on the forked PoW chain.
In the run-up to the merge, the Aave governance community has decisively voted in support of stopping ETH lending. The initial reason for the proposal's introduction was the surge in Aave ETH loan demand that was beginning to put pressure on the liquidity supply.
The complicated structure of Aave's interest rate system uses algorithms to calculate percentages while accounting for the platform's liquidity and borrowing demand. As mentioned in the proposal on August 24, stETH/ETH positions (3) will start to lose money whenever the ETH borrow rate approaches 5%, which will happen soon for a usage rate of 70%, or 63% at the moment.
Then it was stated that if these positions started unprofitably, users would probably rush to unwind them until the ETH borrow rate stabilized at a level where the APY was bearable. This would place more strain on the liquidity of the ETH supply on Aave.
The plan implemented on the same day received 77.87% votes in favor and 22.13% votes against in yesterday's vote. Another DeFi lender (4), Compound Finance, had a request earlier this week relating to forking Ethereum risk mitigation that was approved with 347,559 votes in favor and, crucially, 0 votes against.
Before the dust from the merge settled and the protocol updated its interest model with a jumping rate model with much higher rates after exceeding 80% borrow utilization, which bumps to a maximum rate of 1000% APR if 100% utilization is reached, Compound's idea was set for a borrowing cap of 100,000 ETH.
It is said that this will discourage people from utilizing Compound's platform for excessive borrowing and withdrawals. Despite several stablecoins and projects separating themselves from the PoW chain and the recent decline in the price of ETH, exchanges had outflows of 476,000 on August 29 as customers positioned themselves for free tokens.
This was the third-highest quantity of ETH withdrawals since March, and the company ascribed this to Merge and investors reallocating funds for ETHPoW (5) token collection. To obtain the greatest number of ETHPoW tokens, users probably withdraw their ETH balances from centralized exchanges for non-custodial wallets, causing an increase in the net outflow of ETH from exchanges.
Although it is still unclear if the branched chains will draw a focus on creating a long-lasting ecosystem and community, in the short term, the crypto degens at least appear eager to snatch up free forked tokens.