The issue has gained traction in the last month or so, as many Ether miners are likely to continue operating on a forked PoW chain, or even multiple chains, following the long-awaited Merge.

The increasing number of speculators taking out Ether (ETH) loans in order to maximize their chances of earning forked Ether Proof-of-Work tokens (ETHPoW) has caused problems for decentralized finance protocols.

On-chain hodlers, such as those using non-custodial wallets or holding on exchanges that support ETHPoW, will be airdropped the equivalent amounts of the new tokens to their assets in the event of a fork. This is because your existing balance will be overwritten on the forked PoW chain.

On September 6, the Aave governance community unanimously voted to halt lending in the interim period leading to the Merge.

This proposal was first proposed on August 24 due to an increase in the demand for Aave loans that was beginning to strain the liquidity supply.

Aave has a complex system for granting interest rates, and it uses algorithms to calculate percentages based on the platform's liquidity and demand for borrowing.

"Once the borrowing rate reaches 5%, which occurs shortly after 70% utilization (we are at 63% right now), stETH/ETH positions become unprofitable," according to the proposal as of Aug. 24.

If these positions become unprofitable, users will likely rush to "unwind their stances up until the borrowing rate reverts back to a stable level in which the APY [Annual Percentage Yield] will become tolerable." As a result, the liquidity supply of ETH on Aave will be put under even greater strain.

Yesterday's vote resulted in 77.87% in favor (528,290 people) and 22.13% opposed (150,170 people), and the proposal was implemented the same day.

Earlier this week, another DeFi lender, Compound Finance, also had a forked Ethereum risk mitigation proposal that was voted on, with zero votes against and 347,559 in favor. Compound's concept, which went live on September 5, was to establish the borrowing cap at 100,000 ETH until the dust settled from the Merge.

Furthermore, the protocol's interest model was updated to a jump rate model with much greater rates after exceeding 80% borrow utilization, with the highest rate of 1000% APR if 100% utilization is achieved.

Despite the fact that many stablecoins and projects have distanced themselves from a PoW chain, users are certainly maneuvering themselves to receive free tokens.

According to Delphi Digital's latest report, despite the recent decline in the price of ETH, exchanges saw 476,000 outflows on Aug. 29.

This is the third biggest amount of transactions since March, which the firm attributes to Merge and investors realigning themselves to collect ETHPoW tokens.

"In order to obtain the greatest number of ETHPoW tokens, users are likely withdrawing balances from centralized exchanges to non-custodial wallets, resulting in an increase in the net outflow of ETH from exchanges."

While it is unclear whether the forked chains will generate enough interest to support a long-term ecosystem and community, crypto degens appear eager to scoop up free forked tokens in the short term.

Sep 7, 2022
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