SINGAPORE - Struggling cryptocurrency lender Hodlnaut has warned of risks to its assets if a looming upgrade of the Ethereum blockchain known as "the Merge" stokes a bout of volatility in virtual coins.
Sharp moves in the prices of tokens linked to the Ethereum network could cause "smart contracts to automatically liquidate the assets", the company said in a statement released on its blog on Monday.
Smart contracts are programs that automatically execute when certain conditions are met and are popular in blockchain-based decentralised finance applications, where Ethereum is the dominant network.
Big price swings after the Merge could spark liquidations as such rules are triggered, for instance, in protocols governing collateral, according to Hodlnaut.
Hodlnaut is under judicial management in Singapore after halting withdrawals. The firm, which also operates out of Hong Kong, is among a number that buckled around the world during this year's meltdown in crypto markets.
The hotly anticipated Merge, expected around Sept 15, will transition Ethereum to a more energy-efficient network. Investors are monitoring the long-awaited and challenging software upgrade very carefully, as hiccups could ripple across the crypto ecosystem.
One way to mitigate risks is to unwind tokens deployed on decentralised finance platforms, but that may result in "material losses", Hodlnaut said.
Judicial managers have asked for estimated losses from such an unwinding and any precautionary steps that can be taken to preserve the value of assets.
A rally in Bitcoin and other digital assets fizzled on Monday in Asia in part as traders braced for the Ethereum upgrade. BLOOMBERG