ETHPoW Fork Positioning and DeFi Lending Liquidity Risk
Summary
This analysis examines how anticipation of an Ethereum proof-of-work fork affected ETH borrowing and deposits ahead of the Merge. Borrowers could seek to increase their potential allocation of forked tokens by holding native ETH, while lenders withdrew ETH to reduce exposure to fork-related market and miner extraction risks. The resulting utilization pressure created liquidity and liquidation concerns for lending protocols.
The report compares responses from Aave, Compound, and Euler: pausing borrowing, changing rate models and caps, or keeping lending terms unchanged to attract deposits. It also reviews ETH withdrawals, liquid staking discounts, exchange flows, derivatives positioning, and pre-trading in a fork token as contextual evidence that the activity was tied to fork positioning. The account is a snapshot from September 2022 before the Merge, so proposals and market conditions were time-sensitive. The expected value and availability of fork tokens were uncertain, and the author notes that disruption might be temporary if recipients sold the new asset quickly.
Key ideas
- Borrowing native ETH ahead of a chain fork can increase potential eligibility for the forked token, creating temporary demand for loans.
- Lender withdrawals can raise utilization and borrowing rates, increasing the risk of disorderly liquidations and bad debt.
- Aave, Compound, and Euler used different combinations of borrowing pauses, rate changes, caps, and deposit incentives.
- ETH withdrawals, liquid staking discounts, and cross-market flows helped indicate positioning around the anticipated fork.
- The fork’s token value and lending-market effects were uncertain and tied to a specific pre-Merge period.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.