DeFi Protocols, Stablecoins To Be Affected By Merger

DappRadar says that switching to proof-of-stake could lower the value of stablecoins and reduce the size of lending pools if the Merger should go through.
DeFi Protocols, Stablecoins To Be Affected By Merger
DeFi Protocols, Stablecoins To Be Affected By Merger

A new DappRadar report released on Friday says that Ethereum’s upcoming Merger could greatly affect how DeFi protocols work on crypto’s most popular decentralized finance chain.

The study focuses on the possible delays that could happen during the Merger, which is Ethereum’s move to a proof-of-stake consensus mechanism. The report said that the long-awaited (and often delayed) tech upgrade could slow down transaction times or cause service disruptions across DeFi lending protocols, causing problems for the platforms. In turn, this could cause the value of stablecoins to drop and DeFi lending pools to shrink.

Ethereum is home to an ecosystem of decentralized token trading, lending, and yield-farming projects that process billions of dollars worth of crypto daily. For their services to work, these DeFi protocols depend on Ethereum’s consensus mechanism to work well.

Pedro Herrera, a data analyst at DappRadar, says that the Merge’s effect on the supply of ether on the market could affect DeFi liquidity pools, even if the switch goes smoothly.

“If the launch of the Merger doesn’t go well, DeFi protocols will be delayed, which will affect stablecoins,” Herrera reported. “But from a supply dynamics point of view, this can also hurt how stablecoins will be used in the DeFi space and elsewhere for liquidity pools.”

When Ethereum switches to a proof-of-stake consensus mechanism, the rate at which new tokens are made will likely slow down, especially in the months right after the switch. As token creation slows down, ether will still be taken out of circulation at the same rate as before the Merge by the blockchain’s token-burning mechanism. Over time, this could lower the total amount of ether on the market.

The report also said that DeFi platforms could have network downtime because some Ethereum-based protocols move to the proof-of-stake consensus mechanism slower than the Ethereum chain.

“There is a chance that the Merge will cause technical problems, like nodes’ timestamps getting out of sync with each other or other technical problems that stop the proof-of-stake from being in sync after the Merge,” Herrera said. “This could force Ethereum to stop making blocks or even stop making them for a short time while their developers work on the problem.”

Still, the platforms themselves have shown that they are confident that the Merger will not change how they work. A popular place to trade, Uniswap, said that its services “will continue to work smoothly” during the upgrade.

This week, the Ethereum Foundation put out an official plan and timeline for how the Merger will be finished. On September 6, the Bellatrix upgrade will go live on the Beacon Chain. This is the official start of the switch to a proof-of-stake consensus mechanism.