Ethereum Merge Could Affect Stablecoins & DeFi Protocols, Says Report

28 August 2022, 15:32 GMT+0000
Updated by Ryan James
28 August 2022, 15:32 GMT+0000
In Brief
  • A new DappRadar report has highlighted how the merge could affect stablecoins and DeFi protocols operation.
  • MakerDAO and Grayscale had raised concerns of how the merge could affect stablecoins running on the network.
  • Tether and Circle have revealed support for Ethereum PoS migration.
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Ethereum’s transition to a proof-of-stake (PoS) network could affect DeFi protocols and stablecoins running on the blockchain network, DappRadar revealed in a new report.

According to the report, the stablecoin market is huge, and its use on public blockchains like Ethereum has grown significantly making them integral to DeFi operations.

The report noted that Ethereum Merge could affect the stability of stablecoins as it hosts the majority of DeFi applications. The Merge, scheduled for September 15, will see the Ethereum blockchain move from its PoW consensus mechanism to PoS.

Major stablecoin issuers like Tether (USDT) and Circle (USDC) have already revealed support for the merge. However, some community members still have concerns about this planned migration.

MakerDAO, Grayscale Concerns

MakerDAO, the creator of DAI, which is one of the biggest decentralized stablecoins on Ethereum, highlighted several issues that could come up with an Ethereum merge.

The tweet about potential problems also explained how it planned to solve them. Some issues identified include negative funding, perpetual contract backwardation, network downtimes, replay attacks, etc. 

Additionally, digital currency investment firm Grayscale also expressed worries that the Merge could impact ERC-20 tokens. This is especially possible if there are hard forks, which will likely happen.

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According to Grayscale, the Merge could cause a situation where tokens locked in smart contracts might be locked in forever, forcing holders to start liquidating their tokens before the Merge.

Ethereum Merge Should not Affect Network’s Operations

However, Ethereum developers appear to have considered all these possibilities and made provisions for them. There is a strong belief that the Merge will not affect the network as it will happen on the base layer.

Also, most DeFi protocols are not concerned about these potential issues either. Uniswap is one of them as it said its service wouldn’t be interrupted by the Merge.

Stablecoins Future Remain Contentious

Even if none of these issues come up, the future of stablecoins still represents a major challenge for the DeFi sector. 

With centralized stablecoins dominating decentralized protocols, many DeFi projects have been considering algorithmic stablecoins, according to the report.

But there are still potential regulations for stablecoins that could impact DeFi after the Ethereum merge.

For Be[In]Crypto’s latest Bitcoin (BTC) analysis, click here.

Disclaimer

BeInCrypto has reached out to company or individual involved in the story to get an official statement about the recent developments, but it has yet to hear back.