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The current market conditions are far from perfect for many crypto industry players, and lending platforms are no exception. For the past few months, many have been facing liquidity problems that put stress on their users and the broader crypto space. As the date for Ethereum Merge gets closer Aave has invoked new rules to protect itself from several liquidity issues that come with lending loan for Ethereum (ETH) traders.
Between August 30 and September 2, the Aave community overwhelmingly voted to stop loaning ether, setting aside democratized finance's free market principle to mitigate protocol-wide risks that may arise from Ethereum's upcoming transition to a proof-of-stake (PoS) consensus mechanism from a proof-of-work (PoW) one, dubbed the Merge. The upgrade is slated to happen between September 13-15.
"Ahead of the Ethereum Merge, the Aave protocol faces the risk of high utilization in the ETH market. Temporarily pausing ETH borrowing will mitigate this risk of high utilization," the proposal highlighted by research firm Block Analitica said.
Liquidity issues: Market turbulence on the rise
Celsius made every imaginable business news outlet when it paused all withdrawals due to liquidity issues last month. After announcing it would lay off a quarter of its employees due to "extreme market conditions," Celsius filed for bankruptcy under Chapter 11 of the U.S. bankruptcy code.
Interestingly, it seems like the liquidity issues surrounding the crypto ecosystem can all be traced back to a precise point in time.
Does it seem simplistic to point at Terra for the ripple effects across the crypto markets? It is not. While a single event cannot be at fault for everything going on in crypto, this showcases the worrying fragility of our environment.
And once a domino piece falls, the other ones follow, exposing who chose to rely on "too big to fail" notions.
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