  Lending protocols in decentralized finance enable the permissionless exchange
of capital from lenders to borrowers without relying on a trusted third party
for clearing or market-making. Interest rates are set by the supply and demand
of capital according to a pre-defined function. In the lead-up to The Merge:
Ethereum blockchain's transition from proof-of-work (PoW) to proof-of-stake
(PoS), a fraction of the Ethereum ecosystem announced plans of continuing with
a PoW-chain. Owners of ETH - whether their ETH was borrowed or not - would hold
the native tokens on each chain. This development alarmed lending protocols.
They feared spiking ETH borrowing rates would lead to mass liquidations which
could undermine their viability. Thus, the decentralized autonomous
organization running the protocols saw no alternative to intervention -
restricting users' ability to borrow.
  We investigate the effects of the merge and the aforementioned intervention
on the two biggest lending protocols on Ethereum: AAVE and Compound. Our
analysis finds that borrowing rates were extremely volatile, jumping by two
orders of magnitude, and borrowing at times reached 100% of the available
funds. Despite this, no spike in mass liquidations or irretrievable loans
materialized. Further, we are the first to quantify and analyze
hard-fork-arbitrage, profiting from holding debt in the native blockchain token
during a hard fork. We find that arbitrageurs transferred tokens to centralized
exchanges which at the time were worth more than 13 Mio US$, money that was
effectively extracted from the platforms' lenders.
