DeFi protocol MakerDAO (MKR) has identified seven risks its protocol faces if Ethereum (ETH) is forked.

Futures backwardation and detrimental funding

According to the protocol, the primary danger it faces is future backwardation and detrimental funding.

In this case, whereas spot ETH will get forked PoW tokens, these uncovered to ETH perpetual contracts and quarterly futures wouldn’t.

If this occurs, it might trigger a decline in the associated fee of leverage by way of futures contracts which is able to create aggressive strain on Maker vaults.

stETH low cost

An Ethereum PoW hard fork post-Merge may result in a stETH low cost as a result of staked cash are more likely to turn into nugatory.

Staked Ethereum is locked in and anticipated to be unlocked after the community upgrades to Ethereum 2.0.

But with a PoW hard fork, these staked cash would turn into nugatory as they’d stay locked till a community improve is completed.

The above might lead to stETH’s worth declining primarily based on the anticipated worth of the forked PoW ETH. For Maker, that represents a better danger of stETH liquidity risks and draw back volatility.

Additionally, a reduction in liquid staking property might incentivize leveraged staking conduct, growing the “risk of negative price gaps while raising ETH supply rates on lending protocols.”

External property

A forked Ethereum presents a problem for exterior property working on the community. A fork would power centralized stablecoin issuers, cross-chain bridges, and others to choose an Ethereum chain.

While some, like Chainlink (LINK), has expressed help for the Merge, there may be the likelihood that others might acknowledge ETH forks, given the extent of traction it has gained lately.

Such actions might make their asset bridged into or out of Ethereum nugatory, and any protocol that accepts such property as collateral might have important liquidity points.

Liquidity pool protocols

Another problem the protocol faces is the problem that faces liquidity pool protocols if Ethereum is forked.

According to the DeFi protocol, a major quantity of property might turn into ineffective if the community is pressured, resulting in insolvency within the lending market.

Other risks

Additionally, the protocol faces different risks like oracle networks supplying unhealthy information or community downtime through the Merge interval, which might trigger insolvency or liquidation for Maker vaults. Replay assaults might turn into extra prevalent on each the mainnet and PoW chains.

However, Maker has additionally recognized methods to reduce these risks within the put up. Most of the responses to the danger depend on speaking details about the risks to customers.

Posted In: , ETH 2.0

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