Members of the Ethereum miner community have spoken out recently stating their intentions to create a hard fork before the merge takes place. Let’s dive in.
Up to this point, Ethereum has been a proof-of-work chain. That is, additional Ether is distributed to crypto miners, who compete to solve puzzles that validate transactions and in turn collect the token rewards. However, for years now, Ethereum has planned to switch to become a Proof-of-Stake blockchain. In a Proof-of-Stake blockchain, users can stake their coins, which allows them to validate new transactions and add them to the chain. This transition will make Ethereum less energy-intensive and more deflationary. Okay, okay, enough of the boring stuff. So what’s this deal about a fork?
Whenever a change is made to a blockchain’s protocol, or rules, a fork is created. These forks are often created when a chain needs to be upgraded. A soft fork results in a single chain that is compatible with the original chain. A hard fork on the other hand undergoes much more extensive changes, requiring the formation of a new chain altogether, incompatible with the original chain. These two chains become independent and continue on in different directions. While forks are often created to implement new features, they can also be the result of a disagreement within the community.
The two most historically famous forks are the Bitcoin Cash and Ethereum Classic forks. In 2015, after the Ethereum DAO hack consequented in 150m of ETH being stolen, the community was at a disagreement on how to continue. This led to the formation of the Ethereum Classic ($ETC) hard fork, which is still around today (although it has tremendously underperformed $ETH). A similar disagreement led to the creation of the Bitcoin Cash ($BCH) fork of 2017, which is also still around. So why does the Ethereum community want to fork again?** **
Ethereum has been a POW chain for almost a decade. Miners have been accruing miner rewards the entire time, and the merge will put an end to it. It is for this reason that a large number of miners have always opposed the merge. After all, why wouldn’t they, it will effectively eliminate their source of income, which has been steadily increasing as Ethereum has continued to scale.
This fork will result in two separate chains. ETHPOW, the original Proof-of-Work chain, and ETH, the new Proof-of-Stake chain. So is this a good or bad thing?
Any time where a community is split at least partially is not good. Kevin Zhou speculates that as much as 10% of the Ethereum community could stay with the ETHPOW chain. This would result in direct market share loss for the main Ethereum chain and therefore, $ETH token.
However, this could offer a short (or long) term money-making opportunity for ETH and ERC-20 token holders. A hard fork creates an exact duplicate of the original chain at the time of the fork, which means that ETHPOW will be identical to what ETH is essentially right before the merge. So, holders of Ethereum assets are basically getting a free airdrop of all their assets on a new chain. These can then be sold (if the liquidity is present from buyers) for a potential profit.** **
The most likely outcome, looking back on past forks, is that the Ethereum Neoclassic (as some are calling it) fork becomes a nothing, and P-o-S ETH reigns over all. However, in the event that the merge does not go to plan, a POW fork would theoretically, at least momentarily, reflect that via an influx of users and/or capital.
I think it is possible we see something similar to the Ethereum Classic fork, where there is a small minority of users who choose to stay with, or at least populate the forked chain, but the overwhelming majority of users will stay with the upgraded chain that is Proof-of-Stake. I’m not sure that we should dismiss any sort of positive performance of ETHPOW though, since thousands of miners will have incentive to stay with the chain and continue to accrue ETH - er, ETHPOW - rewards, granted they will be significantly less than before.
In my eyes, this is just another example of issues that might arise during the merge. The merge is the one of, if not the, biggest events to happen in crypto since the birth of Bitcoin, and to assume it will go smoothly and price will explode would be ignorant. I would simply recommend that everyone stays on their toes and not get caught in a narrative as that September 15-16 date approaches, because we have no idea what could happen, but can only hope that it is as seamless as possible.
** **
I hope you guys enjoyed this short little summary. I would really appreciate any feedback in the comments. Thanks for reading!
None of this is financial advice. I am not an expert, nor am I a financial advisor. Please seek the help of a professional. I may hold positions in the securities discussed.
I write and talk about crypto from time to time.
Members of the Ethereum miner community have spoken out recently stating their intentions to create a hard fork before the merge takes place. Let’s dive in.
Up to this point, Ethereum has been a proof-of-work chain. That is, additional Ether is distributed to crypto miners, who compete to solve puzzles that validate transactions and in turn collect the token rewards. However, for years now, Ethereum has planned to switch to become a Proof-of-Stake blockchain. In a Proof-of-Stake blockchain, users can stake their coins, which allows them to validate new transactions and add them to the chain. This transition will make Ethereum less energy-intensive and more deflationary. Okay, okay, enough of the boring stuff. So what’s this deal about a fork?
Whenever a change is made to a blockchain’s protocol, or rules, a fork is created. These forks are often created when a chain needs to be upgraded. A soft fork results in a single chain that is compatible with the original chain. A hard fork on the other hand undergoes much more extensive changes, requiring the formation of a new chain altogether, incompatible with the original chain. These two chains become independent and continue on in different directions. While forks are often created to implement new features, they can also be the result of a disagreement within the community.
The two most historically famous forks are the Bitcoin Cash and Ethereum Classic forks. In 2015, after the Ethereum DAO hack consequented in 150m of ETH being stolen, the community was at a disagreement on how to continue. This led to the formation of the Ethereum Classic ($ETC) hard fork, which is still around today (although it has tremendously underperformed $ETH). A similar disagreement led to the creation of the Bitcoin Cash ($BCH) fork of 2017, which is also still around. So why does the Ethereum community want to fork again?** **
Ethereum has been a POW chain for almost a decade. Miners have been accruing miner rewards the entire time, and the merge will put an end to it. It is for this reason that a large number of miners have always opposed the merge. After all, why wouldn’t they, it will effectively eliminate their source of income, which has been steadily increasing as Ethereum has continued to scale.
This fork will result in two separate chains. ETHPOW, the original Proof-of-Work chain, and ETH, the new Proof-of-Stake chain. So is this a good or bad thing?
Any time where a community is split at least partially is not good. Kevin Zhou speculates that as much as 10% of the Ethereum community could stay with the ETHPOW chain. This would result in direct market share loss for the main Ethereum chain and therefore, $ETH token.
However, this could offer a short (or long) term money-making opportunity for ETH and ERC-20 token holders. A hard fork creates an exact duplicate of the original chain at the time of the fork, which means that ETHPOW will be identical to what ETH is essentially right before the merge. So, holders of Ethereum assets are basically getting a free airdrop of all their assets on a new chain. These can then be sold (if the liquidity is present from buyers) for a potential profit.** **
The most likely outcome, looking back on past forks, is that the Ethereum Neoclassic (as some are calling it) fork becomes a nothing, and P-o-S ETH reigns over all. However, in the event that the merge does not go to plan, a POW fork would theoretically, at least momentarily, reflect that via an influx of users and/or capital.
I think it is possible we see something similar to the Ethereum Classic fork, where there is a small minority of users who choose to stay with, or at least populate the forked chain, but the overwhelming majority of users will stay with the upgraded chain that is Proof-of-Stake. I’m not sure that we should dismiss any sort of positive performance of ETHPOW though, since thousands of miners will have incentive to stay with the chain and continue to accrue ETH - er, ETHPOW - rewards, granted they will be significantly less than before.
In my eyes, this is just another example of issues that might arise during the merge. The merge is the one of, if not the, biggest events to happen in crypto since the birth of Bitcoin, and to assume it will go smoothly and price will explode would be ignorant. I would simply recommend that everyone stays on their toes and not get caught in a narrative as that September 15-16 date approaches, because we have no idea what could happen, but can only hope that it is as seamless as possible.
** **
I hope you guys enjoyed this short little summary. I would really appreciate any feedback in the comments. Thanks for reading!
None of this is financial advice. I am not an expert, nor am I a financial advisor. Please seek the help of a professional. I may hold positions in the securities discussed.
I write and talk about crypto from time to time.
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