Risk Mitigation Plan for the Merge

General
#1

Summary

With the Ethereum Merge coming closer and increased discussion about potential forks, we would like to share an overview of the possible market effects and risks involved in BendDAO.

BACKGROUND

Aave has paused ETH Borrowing until the Merge has gone through, while Compound Finance has opted for a borrowing cap of 100,000 ETH and introduced a jump interest rate model with much higher rates after exceeding 80% borrow utilization, up to a maximum of 1000% APR at 100% utilization.

Aave and Compound are facing great risks since most ERC20 tokens, excluding ETH, will likely be worthless on an ETHPoW chain. Hence, one strategy users may employ to maximize their crypto asset holdings, will likely be to borrow as much ETH as possible, collateralized mainly by ERC20 tokens.

SPECIFICATION

This post focused on the following potential risks and market changes that could impact BendDAO’s operations:

  • ETH Reserves
  • Oracle
  • Network downtime

ETH Reserves

First of all, BendDAO does not make user collateral (bluechip NFTs) available to be borrowed. If users believe that they could potentially benefit from the forked PoW ETH (ETHW) by holding ETH before the Merge this could incentivize ETH depositors to pull liquidity near the Merge.

Impacts for BendDAO:

  • The potential for a decline in ETH Reserves
  • Possible migration of some users from other ERC20 lending protocols to BendDAO

Responses:

Oracle

BendDAO uses NFT floor price from OpenSea and LooksRare as data of price feeding for NFT collateral. Both OpenSea and LooksRare will be in maintenance mode during the Merge. This could potentially impact Oracle price feeds.

Impacts for BendDAO:

  • Increased possibility of outlier data delivered to oracle feeds

Responses:

  • ETH Deposit, ETH Withdrawal, New NFT-backed loan, Repayment, and Auction will be temporarily paused at approximately 3 hours before the Merge
  • Re-able the smart contracts after the floor prices from OpenSea and LooksRare are back to normal on ETH PoS

Network Downtime

The risk of downtime or liveness failures is considered low but is surely higher than during standard ETH operations.

Impacts for BendDAO:

  • Increased risk of downtime and liveness faults around the time of the POS merge
  • Possibility of negative price gaps during any network downtime
  • Reduced ability for users to deleverage or defend their loans

Responses:

  • ETH Deposit, ETH Withdrawal, New NFT-backed loan, Repayment, and Auction will be temporarily paused at approximately 3 hours before the Merge
  • Consider parameter changes to increase the liquidation protection period. (eg raising liquidation threshold, increasing liquidation duration)
  • Encourage users to repay part of the loan before the Merge

NEXT STEP

If the market expected value of the fork grows sufficiently large, this could potentially cause disruption to liquidity on BendDAO.

To further discuss with the community

  • Pause ETH Borrowing for a period of time prior to the merger
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#2

Opinion: against

In the case of other agreements.

  • AAVE：Temporarily pause ETH borrowing
  • Bancor：Do Nothing
    *Bancor voted twice, both choosing to do nothing

Related information.

AAVE:

1. [ARC] Aave ETHPoW Fork Risk Mitigation Plan（Excellent proposal）

Bancor：

1.Proposal: Determine action in the event of a PoW Fork

2.Proposal: Pause Bancor during The Merge

Reason.

  1. The choice to suspend the agreement was not justified by the unknown word “possible”, which should not have been done.
  1. About the possible change in rates, there has been a big change in the borrowing rates on AAVE for eth, but the market has responded quickly, I think the market is perfectly capable of responding to demand.
    Dune - about astETH & awETH on AAVE:Aave stETH WETH
  1. all restrictions on users are a distrust of market forces.

Trust the market !

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