The Merge Could Negatively Affect DeFi And Stablecoin Protocols

Ethereum’s upcoming The Merge event could have a significant impact on decentralized finance (DeFi) protocols and stablecoin stability, according to a latest DappRadar report published on August 26.

The study focuses on delays that may arise during Ethereum’s transition to the Proof-of-Stake (PoS) consensus mechanism, otherwise known as Merge. The long-awaited (and often delayed) technology upgrade could slow transaction times or create service disruptions on DeFi lending protocols, the report said. This could devalue stablecoins and shrink DeFi lending pools.

Ethereum is the foundation of decentralized token trading, lending, and profit farming ecosystem that together processes billions of dollars of cryptocurrency daily. Those DeFi protocols rely on Ethereum’s consensus for their own services to function properly.

Pedro Herrera, a data analyst at DappRadar, said Merge’s negative impact on ETH’s circulating supply could affect DeFi liquidity pools, even if the transition goes smoothly.

“If the Merge fails to successfully be launched, we will have delays on DeFi protocols that will affect stablecoins. But from the supply dynamics perspective, this can also take a toll on how stablecoins will be used for liquidity pools, in the DeFi space and beyond.”

Ethereum’s POS mechanism is expected to slow the rate of new token issuance – especially in the months immediately following the transition. As token issuance slows, combined with the blockchain’s token burning mechanism will continue to remove ETH from circulation at a similar rate to pre-Merger, which can, over time, reduce the total circulating supply of ETH.

It is also possible that DeFi platforms face network downtime as some Ethereum-based protocols lag behind the Ethereum chain in the transition to the PoS mechanism.

“There is the risk that the Merge will result in technical difficulties such as a timestamp desynchronization between nodes or other technical issues that prevent the proof-of-stake to be in sync after The Merge. This could force Ethereum to pause block production or even halt production temporarily as their developers work on the issue.”

Even so, the platforms themselves were confident that Merge would not affect their functionality. Uniswap, a popular exchange, said its services “will continue to function smoothly” throughout the upgrade.

Earlier this week, the Ethereum Foundation released the official schedule and timeline for the completion of The Merge event. On September 6, the Bellatrix upgrade, which kicks off the official transition to the PoS mechanism, will activate on the Beacon Chain.

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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