ETH Removed from Protocols prior to the Merge
This dashboard examines ETH withdrawn from Aave, Compound and UniSwap prior to the Ethereum merge on Sep the 15th.
Why did users want to hold ETH in their wallets prior to the merge ?
- Suppliers were motivated to withdraw their ETH from lending protocols for safety reasons, to avoid a potential inability to access their holdings as they would be lent out to forks’ hunters.
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Borrowers & suppliers wanted to hold ETH in their wallets during the merge to get ETHPoW airdrops. Some ETHPoW forks announced that ETH in liquidity pools will be disqualified from the airdrop. The disqualification is based on the expectation that only ETHPoW could have some potential value and TokensPoW would be worthless. The first couple of blocks after the merge, some fast users would sell ERC20sPoW into ETHPoW using DEXs or borrow ETHPoW using these tokens on lending protocols thus leaving ETH liquidity providers and suppliers with worthless tokens.
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What did Aave suppliers do ?
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On the 2d of September, an on chain proposal was submitted to Aave governance to freeze ETH borrowing during the merge to protect users assets and the protocol itself.
→ The same day, 570m USD in ETH was borrowed from the protocol as hunters tried to front-run each other especially that Compound ETH market was frozen (more below).
→ This sent ETH borrow rate to more than 6%.
→ It seems that some suppliers got scared and withdrew their assets from the protocol. 168m and 176m USD removed on the 2d and 3d of September.
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Sep 5th & 6th : 85m and 138m USD was borrowed from Aave before the market is frozen.
→ This sent ETH borrow rate to 29%.
→ Suppliers removed another 290m USD the same day.
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Sep 7th : Proposal to freeze ETH borrowing executed on chain.
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The last three days prior to the merge: Sep 13th, 14th and 15th, respectively: 266m, 398m and 255m USD were removed by suppliers to benefit from the ETHPow forks.
→ This sent ETH borrow rate to more than 100%.
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Aave stETH market was also impacted as suppliers removed their assets from Aave (70m USD on Sep 6th and 300m USD on Sep 15th):
→ Either to sell stETH for ETH and get the forks.
→ Or, because of the high ETH borrow rate, the recursive borrow strategy of deposit stETH, borrow ETH was no longer viable.
What did Compound suppliers do ?
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Aug 30th : Compound governance executed a proposal to update the oracle system. The new oracle had empty prices for ETH.
→ Without a functioning price feed meant that ETH market couldn’t function properly especially borrowings & liquidations.
→ However, some users were still able to withdraw their ETH “eg: tx_hash: 0x0d9323b6b6a593f3fdaa38c58394c59ad86eedb1d989c274c3b7a3a095632247 on the 3d of September”. Since the market wasn’t officially frozen, these could be suppliers that didn’t need an oracle feed to withdraw their assets. Maybe these are users that supplied ETH without using it as collateral.
→ In any case, ETH withdrawal on Compound between Aug 30th and Sep the 7th was very limited.
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Sep 7th : The proposal to revert the oracle system to its previous version was executed and ETH market back to functioning normally.
→ The same day the ETH market was back to normal, 198m USD in ETH was removed by suppliers.
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Sep 10th : Compound governance executed a proposal to cap ETH borrowing at 100k ETH and implement an aggressive rate strategy after 80% utilization (up to 1000% APR at 100% utilization).
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Between Sep 7th and 15th : ETH Borrowings on Compound were relatively higher than usual without any major spikes, except :
→ Sep 14th : Around 60m USD which sent ETH borrow rate to 6.8%
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Between Sep 8th and 15th : ETH withdrawals were higher than usual but without any major spikes.
→ It seems that the oracle malfunction which was followed by the borrow cap and the aggressive rate strategy protected compound from the rate volatility witnessed on Aave.
→ The 1000% borrow rate at 100% utilization of the borrow cap (100k) meant that borrowers would be paying around 2.74% daily rate, a high cost to pay for uncertain forks.
Methodology
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Aave v2 data is identified using the token address (WETH) from the aave.ez_withdraws and aave.ez_borrows tables, excluding Aave v1 and Aave AMM.
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Compound data is identified using the token address (cETH) from the compound.ez_redemptions and compound.ez_borrows tables.
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Uniswap withdrawals are identified using the pool address, the token address (WETH) and the origin to address (Uniswap V3: Positions NFT) in the ez_token_transfers table (Ethereum core).
What did Uniswap Liquidity Providers (LPs) do ?
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It seems that Uniswap v3 LPs in the major pools (TVL > 100m USD) didn’t withdraw their ETH prior to the merge.
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The only mentionable spike was on Aug 22d & 23d from the WETH/USDC 5bps pool :
→ These are probably LPs withdrawing and redepositing their assets into a new price range or normal withdrawals unrelated to the merge since they were made 3 weeks before the event.
→ Any rational LP wouldn’t give up 3 weeks trading fees especially knowing that DEX LPs funds remain accessible, unlike lending protocols in the case of excessive borrowing.
Conclusion
The ETH merge had more impact on lending protocols than DEXs. While ETH deposited into both protocol types were disqualified from some ETHPow forks, lending protocol suppliers had a more important reason to withdraw their ETH : The inaccessibility of their funds in case of excessive borrowing.
Both Aave and Compound implemented new features to protect their users and the protocol itself. However, it seems that Compound’s oracle malfunction acted as a bliss and helped the protocol avoid major rate volatility witnessed on Aave.