Ethereum merge

The Ethereum merge

We now know that the Ethereum merge will happen on either the 15th or 16th of September.  For the community that has been waiting years, this is a huge step forward and much-anticipated development.

There are several reasons why the process of moving to ETH 2.0 has taken so long, not least of which being the degree of complexity in transitioning a blockchain’s consensus mechanism from Proof of Work to Proof of Stake.

The Ethereum community is keen to ensure that there are no bugs in the code and that everything has been checked thoroughly before deploying such huge changes, and this is why attention to detail is so important.

So far, it appears that everything has been going quite successfully, and without any existential threats to the Ethereum ecosystem.  The Görli Testnet has now successfully migrated from PoW to PoS and did so without issues.

The shift to Proof of Stake means that the Ethereum mining industry will be decimated.

Certainly, changing a consensus mechanism is a contentious thing to do: moving to PoS is disastrous for miners, who will now be forced to either lose their main source of revenue or find a different community to work with.

Vitalik’s war against ETH miners

This isn’t the first of Vitalik’s proposals that have disenfranchised the Ethereum miners.  Last year, the introduction of EIP-1559 meant that instead of transaction fees being paid to miners to supplement their income from mining blocks (2 ETH per block mined), the transaction fee would be burned.

As with the transition to PoS, this proposal was extremely popular in the broader community.  Other parts of the proposal meant that there is now also greater stability in the fees paid on transactions.

However, the miners weren’t happy. Buterin’s proposal killed off a large source of their revenue.

An inevitable  ETH fork?

The last time that ETH had a significant hard fork was after the DAO hack in 2016, when Vitalik forked the chain in order to recover funds that he’d lost via the exploit of The DAO.

This split the chain into Ethereum and Ethereum Classic, and was extremely damaging for the ecosystem at the time.

Although they are a minority, there are many people within the community who are huge advocates for PoW because of this reason. The ETHPoW Team has written an open letter in which  they explain their plans to fork Ethereum.

The initiative, led by an  Ethereum miner can Chandler Guo, represents a further fracturing of the Ethereum community.  The development team behind Ethereum classic maintain that the fork won’t work, and that the miners should just save their energy and migrate to Ethereum Classic instead.

Guo maintains that Ethereum Classic is not large enough to accommodate all Ethereum miners, and so there must therefore be several PoW forks.

What should I do in the event of a hard fork?

According to Guo, the fork will allow for Ethereum to operate on two separate chains.  This will allow miners to continue their mining operations on a separate chain, and each chain would have their own tokens running on top of it.

This poses a problem not only of fractured liquidity, but that there are too many tokens in circulation.  Stablecoin issuers such as Circle must redeem USDC for USD when asked, but if the chain is forked and there is twice as much USDC in circulation, then clearly Circle can’t honour claims made on both chains.

This means that, despite what Guo may hope for, the Ethereum Classic miners have warned that this fork will not work.  All of the tokens that are on the forked chains will ultimately be worthless and all the value will concentrate into the PoS chain instead.

For speculators and investors, the safest thing to do is probably not to own Ethereum at such at pivotal moment: Bitcoin is not going through such a large transition of changing its consensus mechanism and is a far less risky asset.

However, those who want the extra risk in hope of the extra reward ought to ensure that they don’t find themselves in a position where they are holding significant quantities of tokens on the wrong chain – as they may all end up completely worthless.

Those who are seeking even more risk might turn to investing in Ethereum Classic, which will most surely experience an uptick in hash rate after the merge as many miners choose to simply move to the more established chain rather than this riskier fork.

Trading the ETH/ETC pair during this time is a risky and volatile pursuit, and could be quite catastrophic for those who get it wrong.

Guo plans to stage the fork in September, shortly after the merge goes live.  It shall be interesting to see whether or not this new fork can survive – if it doesn’t get enough hash rate then may not even do that, as it could quite easily  suffer a 51% attack.

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