Investors Rush to Borrow ETH in Hopes of an Airdrop Ahead of The Merge

With The Merge just a week away after the successful activation of the Bellatrix hard fork on September 6th, ETH investors are scrambling to leverage the lending market in hopes of scoring potential airdrops.

From Controversy to Sky-High Expectations

As The Merge approaches, the Ethereum community is buzzing with speculation about potential rewards, particularly regarding an airdrop of ETHW — Ethereum’s Proof-of-Work version. Since early August 2022, debates have intensified over Ethereum’s future post-Merge, not only about mining but also concerning the interests of individuals and organizations attached to the PoW version of Ethereum.

Tensions peaked as major crypto players like Chainlink, Aave, Tether (USDT), USDC, and Vitalik Buterin voiced their support for Proof-of-Stake (PoS). In contrast, Poloniex, BitMEX, Bitfinex, and Tron founder Justin Sun have supported the PoW direction, with exchanges like MEXC and Huobi still deliberating.

The Rush to Borrow ETH

Despite uncertainty about whether a chain split or the ETHW token will hold significant value relative to USD and ETHS (ETH Proof-of-Stake), traders are aggressively seeking opportunities in this "hypothesis." Many are borrowing ETH from the current PoW blockchain with plans to claim airdrops post-Merge and sell the ETHW they receive. Consequently, the volume of ETH borrowed from lending platforms has surged, prompting these platforms to adjust their strategies to manage the increased borrowing activity.

Reactions from Leading Lending Platforms

Aave

Aave has proposed halting ETH lending and significantly increasing the adjustable APR from 103% to 1,000% temporarily before The Merge. In a risk mitigation plan announced on August 24th, Aave cited potential risks related to ETH demand, such as difficulties in liquidation, negative APY on ETH borrow positions, and increased ETH withdrawals by liquidity providers.

Compound

In contrast, Compound’s approach focuses on limiting excessive use by implementing borrowing caps, switching to a variable interest rate model, and raising borrowing rates to align with liquidity for withdrawals. Michael Bentley, co-founder and CEO of Euler Labs, explained that Compound's jump-rate model sets rates based on utilization: 2% at 0% utilization, 20% at optimal utilization, and 1,000% at 100% utilization, with optimal utilization set at 80%. Compound asserts that these measures will be sufficient to prevent full utilization of borrowing markets and ETH withdrawals while mitigating insolvency risks and disruptions to other markets.

However, Bentley disagrees with the approaches taken by these lending platforms, warning that users might be caught up in the hype surrounding The Merge and the ETHW airdrop. As a result, they may end up paying more in interest than they gain from ETHW.

“Nothing in this world is free. Borrowing ETH will cost you ETH. The interest rate you pay depends on how early you start borrowing and the fluctuating rate at each point in time.”