7 Possible Risks If Ethereum Is Forked

DeFi Protocol MakerDAO (MKR) has identified 7 risks their protocol faces if Ethereum is forked.

Futures contracts with a delay in selling and a negative funding rate

According to the protocol, the first risks they face are put-off futures and negative funding rates.

In this case, while holders of spot ETH will receive fork PoW tokens, those exposed to ETH perpetual and quarterly futures will not. If this happens, it could reduce the cost of leverage through futures contracts, creating competitive pressure on Maker vaults.

stETH Discount

Ethereum PoW hard fork after Merge could lead to stETH price drop as staked coins are likely to become worthless. ETH once staked will be locked and is expected to be opened after the network upgrade to Ethereum 2.0.

But with the PoW hard fork, these staked coins will become worthless as they remain locked until the network upgrade is completed. Protocol tweeted:

External assets

The Ethereum fork poses a challenge to external assets operating on the network. The fork will force centralized stablecoin issuers, cross-chain bridges, and others to choose a PoW or PoS chain.

While some projects like Chainlink have expressed support for Merge, it is likely that others will accept the ETH fork, based on how much traction they have achieved recently.

Such actions could render assets connected to or taken from Ethereum worthless. At the same time, any protocol that accepts that asset as collateral could have serious liquidity problems.

Liquidity pool protocols

Liquidity pool protocols are also not immune to the effects of a fork of Ethereum. According to the DeFi MakerDAO protocol, a lot of assets can become useless if the network is forked, leading to insolvency in the lending market.

Other risks

In addition, the protocol faces other risks such as the Oracle network providing bad data or network downtime while the Merge takes place. This could cause insolvency or liquidation for Maker vaults. Replay attacks may become more common on both the mainnet and the PoW chain.

However, Maker has also identified ways to mitigate these risks in the post. Most responses are based on communicating risk information to the user.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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