MakerDAO identifies risks of an Ethereum hard fork

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

Futures backwardation and antagonistic funding

According to the protocol, the archetypal hazard it faces is aboriginal backwardation and antagonistic funding.

In this case, portion spot ETH volition get forked PoW tokens, those exposed to ETH perpetual contracts and quarterly futures would not.

1️⃣ Futures Backwardation & Negative Funding.

Spot ETH would person PoW forked tokens, portion vulnerability to ETH quarterly futures oregon perpetual contracts would not.

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— Maker (@MakerDAO) August 5, 2022

If this happens, it could origin a diminution successful the outgo of leverage done futures contracts which volition make competitory unit connected Maker vaults.

stETH discount

An Ethereum PoW hard fork post-Merge mightiness pb to a stETH discount due to the fact that staked coins are apt to go worthless.

Staked Ethereum is locked successful and expected to beryllium unlocked aft the web upgrades to Ethereum 2.0.

2️⃣ stETH Discount

stETH is apt to go worthless connected immoderate PoW Ethereum fork.

This is due to the fact that further concatenation upgrades would beryllium required to unlock staked ETH from the deposit contract, and determination is arguably small economical inducement for the fork concatenation to accommodate this

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— Maker (@MakerDAO) August 5, 2022

But with a PoW hard fork, these staked coins would go worthless arsenic they would stay locked until a web upgrade is done.

The supra whitethorn effect successful stETH’s worth declining based connected the expected worth of the forked PoW ETH. For Maker, that represents a higher hazard of stETH liquidity risks and downside volatility.

Additionally, a discount successful liquid staking assets could incentivize leveraged staking behavior, expanding the “risk of antagonistic terms gaps portion raising ETH proviso rates connected lending protocols.”

External assets

A forked Ethereum presents a situation for outer assets operating connected the network. A fork would unit centralized stablecoin issuers, cross-chain bridges, and others to prime an Ethereum chain.

3️⃣ External Asset Fork Choice

Ethereum hosts a wide assortment of externally backed assets.

This includes cross-chain bridges, centralized stablecoins, and real-world assets.

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— Maker (@MakerDAO) August 5, 2022

While some, similar Chainlink (LINK), has expressed enactment for the Merge, determination is the anticipation that others could admit ETH forks, fixed the level of traction it has gained recently.

Such actions whitethorn marque their plus bridged into oregon retired of Ethereum worthless, and immoderate protocol that accepts specified assets arsenic collateral could person important liquidity issues.

Liquidity excavation protocols

Another situation the protocol faces is the contented that faces liquidity excavation protocols if Ethereum is forked.

1️⃣ Liquidity Pool Protocols.

A important subset of assets would go worthless successful the hypothetical forked chain.

This could origin insolvency successful lending markets, and incentivize users to get each disposable ETH arsenic the plus astir apt to clasp immoderate post-fork value.

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— Maker (@MakerDAO) August 8, 2022

According to the DeFi protocol, a important fig of assets could go useless if the web is forced, starring to insolvency successful the lending market.

Other risks

Additionally, the protocol faces different risks similar oracle networks supplying atrocious information oregon web downtime during the Merge period, which could origin insolvency oregon liquidation for Maker vaults. Replay attacks could go much prevalent connected some the mainnet and PoW chains.

This thread is focused connected the pursuing imaginable fork risks that could interaction Maker:

1️⃣ Liquidity Pool Protocols.

2️⃣ Oracle Networks and Indices.

3️⃣ Network Downtime.

4️⃣ Replay Attacks.

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— Maker (@MakerDAO) August 8, 2022

However, Maker has besides identified ways to minimize these risks successful the post. Most of the responses to the hazard trust connected communicating accusation astir the risks to users.

The station MakerDAO identifies risks of an Ethereum hard fork appeared archetypal connected CryptoSlate.