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What are the dangers of Ethereum for DeFi and stablecoins?

What are the dangers of Ethereum for DeFi and stablecoins?

The Ethereum network’s Marj update, which will reduce its energy consumption by more than 99.9% by changing the network’s consensus mechanism from Proof of Work (PoW) to Proof of Stake (PoS), will begin in less than two weeks. As a result of this update, transactions are validated using the new proof-of-stake network, and validator nodes that have staked 32 Ether each issue new Ether by registering blocks. But this historic update carries less-discussed potential risks to the DeFi space.

According to Blockchain Homeland and quoted by DappRadar, despite the great excitement about the update of the Ethereum platform, this update also comes with potential risks. The Ethereum network hosts billions of dollars of capital locked in the DeFi space and a significant amount of stablecoins locked in smart contracts. Marj’s potential threats to these assets have caused not everyone to be excited about Marj’s approach.

For example, Middao, the DAI stablecoin provider, recently posted on its official Twitter page, Tweet thread has published about the dangers of Ethereum and believes that this update may do more harm than good. In this report, it is stated that Marj can cause outbreaks Backwardation phenomenon Be negative in future contracts and funding.

Ethereum in spot contracts receives the cryptocurrency of the forked networks, but Ether involved in seasonal or permanent futures contracts will not receive the cryptocurrency of the forked networks, and this issue can cause the price of ether to fall in the futures contracts. A decrease in the price of an asset in a futures contract compared to a spot contract is called backwardation. This phenomenon raises the cost of leverage in futures contracts and puts a lot of pressure on the DeFi platforms.

Meeker also stated that most likely Copy price of stETH In a forked network, it will tend to zero, because in a proof-of-work network, staking makes no sense and all users try to swap stETH copy with ETH copy (probably ETHW) at the first opportunity.

It should also be noted that many assets on the Ethereum network are backed by assets outside the network. including this category of assets Stablecoins are. In this way, the issuer of these assets must recognize one of the proof-of-shares network and the proof-of-work network that will be formed after Marj as the main network. Major stablecoins such as USDT and USDC have already announced their support for Ethereum Proof of Stake, but among the multitude of assets on the Ethereum network that have external backing, it is likely that a number of them will recognize the Proof of Work network. It makes the main net worthless.

In addition to this, while transferring the Ethereum network to proof of stake Risk of technical failure There is one that can make the network unavailable. If Ethereum goes down for a while, DeFi protocols like Maker could face a sudden drop in the value of collateral, which could leave many funds with Liquidation or even face bankruptcy. Even if the risk of network unavailability is considered low, the consequences for the DF space are certainly heavy. Additionally, even if the network remains available, some service providers may still experience outages.

In addition to the risks mentioned by the risk maker Rerun attack It also threatens users of forked networks from Ethereum, which Blockchain Homeland has addressed in a separate article.

In addition to Maker, Grayscale is also concerned about the potential risks of the Ethereum market, especially on the native tokens of this network. has warned. Grayscale’s concern is that Marj’s update would create a scenario where Stablecoins and tokens locked in smart contracts cannot be released. Gary Skille believes that even if the probability of this scenario is technically low, the fear it creates among holders of various tokens and stablecoins could cause intense selling pressure and create a wave of liquidations.

Despite the validity of all the concerns raised in Meeker and Grayscale’s reports, it is necessary to pay attention to the Marj update, which is somehow the biggest and The most important update in cryptocurrency history It has been studied for a long time by Ethereum developers, and probably these people are aware of all the possible risks of Marj and have planned to minimize the risks ahead.

  • What are the potential risks of Marj Ethereum?
  • The phenomenon of backwardness of futures contracts (Futures Backwardation)
  • A drastic drop in Ether liquidity in the event of a successful proof-of-work fork
  • The need to choose between proof-of-work and proof-of-stake for assets backed outside of the Ethereum network, such as stablecoins
  • The risk of the Ethereum network being unavailable and massive liquidations in the DeFi space
  • Risk of replay attack and loss of assets on the main network

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