DeFi protocol MakerDAO (MKR) has identified seven dangers its protocol faces if Ethereum (ETH) is forked.
Futures backwardation and unfavorable funding
Based on the protocol, the primary danger it faces is future backwardation and unfavorable funding.
On this case, whereas spot ETH will get forked PoW tokens, these uncovered to ETH perpetual contracts and quarterly futures wouldn’t.
1️⃣ Futures Backwardation & Adverse Funding.
Spot ETH would obtain PoW forked tokens, whereas publicity to ETH quarterly futures or perpetual contracts wouldn’t.
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— Maker (@MakerDAO) August 5, 2022
If this occurs, it may trigger a decline in the price of leverage by futures contracts which is able to create aggressive strain on Maker vaults.
stETH low cost
An Ethereum PoW exhausting fork post-Merge may result in a stETH low cost as a result of staked cash are prone to turn out to be nugatory.
Staked Ethereum is locked in and anticipated to be unlocked after the community upgrades to Ethereum 2.0.
2️⃣ stETH Low cost
stETH is prone to turn out to be nugatory on any PoW Ethereum fork.
It is because additional chain upgrades could be required to unlock staked ETH from the deposit contract, and there may be arguably little financial incentive for the fork chain to accommodate this
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— Maker (@MakerDAO) August 5, 2022
However with a PoW exhausting fork, these staked cash would turn out to be nugatory as they’d stay locked till a community improve is completed.
The above could end in stETH’s worth declining based mostly on the anticipated worth of the forked PoW ETH. For Maker, that represents a better danger of stETH liquidity dangers and draw back volatility.
Moreover, a reduction in liquid staking property may incentivize leveraged staking habits, growing the “danger of unfavorable value gaps whereas elevating ETH provide charges on lending protocols.”
Exterior property
A forked Ethereum presents a problem for exterior property working on the community. A fork would pressure centralized stablecoin issuers, cross-chain bridges, and others to select an Ethereum chain.
3️⃣ Exterior Asset Fork Alternative
Ethereum hosts a broad number of externally backed property.
This consists of cross-chain bridges, centralized stablecoins, and real-world property.
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— Maker (@MakerDAO) August 5, 2022
Whereas some, like Chainlink (LINK), has expressed assist for the Merge, there may be the likelihood that others may acknowledge ETH forks, given the extent of traction it has gained not too long ago.
Such actions could make their asset bridged into or out of Ethereum nugatory, and any protocol that accepts such property as collateral may have important liquidity points.
Liquidity pool protocols
One other problem the protocol faces is the problem that faces liquidity pool protocols if Ethereum is forked.
1️⃣ Liquidity Pool Protocols.
A big subset of property would turn out to be nugatory within the hypothetical forked chain.
This might trigger insolvency in lending markets, and incentivize customers to borrow all accessible ETH because the asset almost definitely to retain some post-fork worth.
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— Maker (@MakerDAO) August 8, 2022
Based on the DeFi protocol, a major variety of property may turn out to be ineffective if the community is compelled, resulting in insolvency within the lending market.
Different dangers
Moreover, the protocol faces different dangers like oracle networks supplying dangerous knowledge or community downtime in the course of the Merge interval, which may trigger insolvency or liquidation for Maker vaults. Replay assaults may turn out to be extra prevalent on each the mainnet and PoW chains.
This thread is targeted on the next potential fork dangers that might impression Maker:
1️⃣ Liquidity Pool Protocols.
2️⃣ Oracle Networks and Indices.
3️⃣ Community Downtime.
4️⃣ Replay Assaults.
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— Maker (@MakerDAO) August 8, 2022
Nevertheless, Maker has additionally recognized methods to attenuate these dangers within the put up. A lot of the responses to the chance depend on speaking details about the dangers to customers.
