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Abstract
In this article, we discuss the feasibility of splitting a new chain in an ethereum merger, resulting in an ETH2 Token and a new ETHPoW Token. In terms of Token prices and economic chain usage, it is almost certain that ETHPoW will be the one with minority support. While the ETHPoW chain may face many technical challenges and questions about its long-term viability, its existence may provide exciting opportunities for traders and speculators in the short to medium term.
Overview
After several delays, it appears that the merger will finally begin in September 2022. Tim Beiko, a core Ether developer, suggested Monday, September 19, 2022 as a possible merger date during a developer conference call on July 14, 2022. The first major part of the merger is to stop proof-of-work (PoW) mining. The consensus part of Ethernet chooses which blockchain to follow and will then move to an already existing proof-of-stake beacon chain. However, the date of September 19, 2022 is far from final, clients with merge time parameters have not yet been released, and until then, there is still a great deal of uncertainty about the exact timing of the merger.
After the merger, two Ether clients will need to be running, namely a consensus layer client and an execution layer client, such as Geth, which will still validate and process Ether smart contracts and transactions. It is worth pointing out that even after the merger, pledgers will not be able to withdraw their pledged Ether to the execution layer, and a "second merger" could take another 6 to 12 months.
When discussing the merger, many reported broad support in the Ether community for shutting down PoW. at a recent conference Vitalik mentioned that if someone didn't like it they could always use Ethereum Classic (i.e. ETC , a product of the 2016 DAO Wars). However, as expected, PoW miners will certainly not support the shutdown of PoW. why would they? They would be completely shut out of the Ether system. eip-1559 is nothing compared to that, and this time their possibility of getting revenue from Ether drops to zero. For months, some miners have been raising their voices behind the scenes against the merger and expressing a desire for "someone to step up and do something about it". Finally on July 29, 2022, one of the biggest players in China's mining ecosystem, "Bao Erji" (Guo Hongcai), indicated that he might plan to continue mining on the Ether PoW chain.
If the PoW chain still exists and continues to expand, there is speculation that such a coin could be called ETHPoW. Whether this chain makes any economic sense is an open question in our opinion. There is a view that the chain could exist for a long time. PoS may have some weaknesses compared to PoW (e.g. Staking derivatives becomes a natural monopoly) that ultimately make PoS chains less attractive than PoW chains in some use cases. All smart contract platforms competing with Ether (except perhaps ETC) have gone the way of PoS, so the emergence of a new PoW smart contract chain might gain a lot of traction. There are no real candidates other than ETHPoW.
In any case, amidst the nostalgia for the 2016/17 Bitcoin and Ether split era, ETHPoW looks like it might garner some interest from market participants.
Ice Age (Ice Age)
More than seven years ago, when Ether's PoS system was just a series of wacky and broken ideas on a drawing board, Vitalik already foresaw the potential problem. And to that end, he came up with a solution called 'Ice Age'. In this system, the difficulty of mining the network with PoW increases exponentially over time, and eventually it becomes impossible to scale the chain effectively. After the initial Frontier client, Ether's first major network upgrade was called 'Ice Age', which included the first difficulty bomb. This bomb was to 'detonate' in 2017 when the Serenity upgrade was to transition the network to PoS, but ultimately the PoS upgrade was delayed, and thus the bomb was delayed by the hard fork.
In fact, the difficulty bomb has been a 'dud' many times in the past. For example, in early October 2017, the average block out time for Ether was about 30 seconds, before the difficulty bomb system was reset and the average block out time dropped back to a normal 13 seconds or so. The difficulty bomb has been reset six times in Ether's history, with six hard forks.
The most recent reset was proposed in June 2022, and the bomb is now expected to 'detonate' in mid-September 2022, the perfect time to switch to PoS, just like the original plan back in 2015. While the bomb will be in September, based on the timing of previous bombs going off, the impact on average block spacing could take several months to become significant. Calculations estimate that it could take 175 days for the average block-out time to reach 30 seconds, after which the situation should deteriorate exponentially.
Another interesting factor is that this transition to PoS is 'really coming'. Compared to ETH, the price of ETHPoW is likely to be lower and may fluctuate dramatically. This may reduce the desire of miners to mine ETHPoW, so it could be very challenging to accurately assess the situation during the Ice Age.
The New ETHPoW Hard Fork Client
With the arrival of ice age, the previous PoW chain may only last a few hundred days beyond the fork. If the PoW chain is to survive long term, it will need to hard fork a new client to permanently remove the effect of ice age. This poses some problems for ETHPoW, which is perhaps the point of ice age. ETHPoW will not be able to claim to be orthodox or conform to the original rules of the chain. It would also require a hard fork. However, not many Ether users today probably really care about this, which seemed to be more valued seven years ago.
At the same time, any ETHPoW community will need to find developers with the technical expertise to write the new client. They also need to solve a schelling point problem, agree on a new client and new parameters to remove ice age and activate a hard fork. The community then needs to convince trading platforms and custodians to run and support this new client, which may be slightly more difficult than convincing them to continue running the old Geth node alongside the new ETH2 infrastructure. However, in practice, these issues can be easily overcome and the ETHPoW community is unlikely to be particularly large, so this should not be a major problem. There will probably be some large miners funding the entire operation behind the scenes.
ETH in locked pledges
Currently, there are about 13.2 million ETH pledged on the beacon chain, or close to 14 million if you include the actual balance (Ether obtained through pledges plus any deposits above the 32 ETH threshold). As far as we know, in the initial stages of the ETHPoW chain, these funds will be lost forever if a hard fork does not occur. In contrast, on the ETH2 chain, these ETH can be sent back to the execution layer at some point in the future. This has several consequences for the ETHPoW chain. First, one might argue that this could drive up the price of ETHPoW because there is a fraction less ETH available on the ETHPoW chain. Or, it could reduce the chain's credibility and hurt ETHPoW as users lose a lot of money.
If a new ETHPoW client is hard forked, the community will face a choice on what to do with the pledged ETH in order to solve the ice age problem. This is a dilemma. One possible outcome is that since it is a PoW coin, the community can lock the pledged Token forever. In the ETHPoW world, pledging is the wrong choice. The cumulative pledged proceeds of about 800,000 ETH gained at least before the merger should be deemed completely illegitimate on the ETHPoW chain. Therefore, if you are a verifier or own stETH, you may not receive additional revenue on the ETHPoW chain.
Stablecoin
Many people speculate that in the event of a controversial ethereum fork, the decision would no longer belong to the ethereum foundation or Vitalik. they believe that the new king makers in this case could be the custodians of Stablecoin. These custodians would have to choose a chain to support and, considering the popularity and prevalence of these Stablecoins and their interconnectedness with Defi, their decision would determine the winning chain. So perhaps it is Jeremy Allaire (CEO of Circle and issuer of USDC) who is the most powerful person in Ether, not Vitalik.
Of course, Jeremy is the CEO of a company that has to respond to his customers, and not doing so may mean he is not acting in the best interests of his shareholders, which may be illegal, so he may not really have that power in reality. However, if Circle is officially ordered to support one or the other chain for some regulatory reason, that's a different story. This is one of the potential weaknesses of Etherium at the moment.
If the merger results in a chain fork, it appears that Circle, Tether, Binance and other Stablecoin custodians will all support ETH2. So, even excluding strong support for ETH2 from the Ether Foundation and the community, the outcome of this split is clear: ETH2 will be the winner and ETHPoW will be the loser. On ETHPoW, many Defi Apps that rely on USD Stablecoin will collapse financially in a catastrophic way. However, there are other implications of this position of Stablecoin issuers, which we will discuss later in this article.
Selling ETHPoW
Many ethereum extremists strongly support the shift to PoS and therefore will not like ETHPoW. They probably want the ETHPoW chain to die out quickly.
Then there is a layer of thought on top of that. Ether maximalists should actually (somewhat perversely) want the ETHPoW chain to survive, at least for a while, so they can sell ETHPoW Token in the market and get more ETH (or dollars). This way they can make money from what they consider to be "stupid" ETHPoW supporters before ETHPoW slowly dies out in the next few years. As a result, many will likely sell their ETHPoW Token as quickly as possible and the price may weaken.
There is a third layer of thought on top of this, a third layer. What practically everyone should do (with or without Ether) is to buy ETHPoW Token as soon as possible after the merger happens. explained below.
The value of the ETH fork token
In order to sell ETHPoW for ETH, one needs to wait for a centralized trading platform to support ETHPoW after the merger. while centralized trading platforms like FTX and Binance may launch their products soon, it will still take some time, at least a few hours or days, to support ETHPoW deposits. No matter how well prepared they are, they will need to protect themselves from double-spend attacks as both the computing power and block-out times on ETHPoW may be unstable.
On the other hand, theoretically, no matter what happens, once the merger happens, users should be able to go to a centralized trading platform on the chain to buy ETHPoW. Regardless of your opinion of ETHPoW, do you definitely think that Token is better than all the other ERC-20 Tokens on the ETHPoW chain?
Let's think about some of the Tokens on Ether today.
USDC on ETHPoW - worthless because Circle will choose ETH2 and therefore the Token will not be redeemable, as mentioned above. USDT on ETHPoW - also worthless Wrapped Bitcoin on ETHPoW - worthless because the custodian will choose ETH2 and therefore the Token will not be redeemable for Bitcoin BNB on ETHPoW - worthless, because Binance will choose ETH2 Uniswap on ETHPoW - The long-term viability of Token on the ETHPoW chain is questionable. token may crash faster than ETHPoW stETH on ETHPoW - Since there is no collateral on this chain, these Token may be worthless, as discussed above All other ERC-20 Token on ETHPoW - may have very limited value on the ETHPoW chain Therefore, the best strategy may actually be to buy as many ETHPoW as possible before trading on a centralized trading platform and subsequently sell ETHPoW on the centralized trading platform. this is like a free call option on ETHPoW.
Merger Trading Strategies
As with these potentially controversial blockchain forks of the past, the Ether merger offers an exciting trading opportunity. One possible 'risk-free' trading idea is as follows.
before the merger, convert all your USD into USDC in your own Ether wallet
Immediately after the merger, sell your USDC on the ETHPoW chain and exchange it for ETHPoW Token on a centralized trading platform such as UniSwap or Curve
once the centralized trading platform opens ETHPoW deposits, sell all ETHPoW for USD
Gain profit
By making the above transactions, you can potentially make a profit with almost zero risk. Zero risk means that only certain types of risk (e.g. price movements) are taken into account.
Of course, the actual execution of the above trades is actually quite complex and risky, and there are several issues to manage.
Transactions need to be executed on short notice, as there may be a race to take advantage of the opportunity. The funds in the liquid pool supporting the sale of ETHPoW may dry up quickly. You will need to manage your own keys, rather than using a custodian. It is unlikely that any third-party custodians will support ERC-20 Token on ETHPoW soon after the split, if at all. Basically the infrastructure used to interact with the decentralized trading platform is likely to support merging and will only run on ETH2. Therefore, you may need to run your own Ether node and interact directly with the trading platform smart contracts on ETHPoW. For some traders, this can be quite complicated, but this difficulty is where profit opportunities may arise. Practice may be needed before the ETH1 fork. You may need to make sure that your USDC sell/swap orders are not made on the ETH2 chain again. It may be necessary to create split smart contracts. Liquidity providers may become aware of this potential risk very quickly and withdraw liquidity before and after the merge. However, some liquidity providers may not do so, thus creating opportunities. Many DeFi protocols rely on price predictions and it may not be clear how these will handle ETHPoW chains. There may be more advanced strategies to try in DeFi, including leveraging, lending or providing liquidity, which we will not discuss at this time.
Conclusion
Any chain fork that occurs at the time of the Ethernet merger could be an interesting return to the 2016/17 era. While ETHPoW faces many technical challenges, as long as the chain survives, there will be a positive narrative around its Token, and leading centralized trading platforms may open up their transactions. The crypto space is still full of narrative and noise. ETHPoW will bring a lot to get excited about, and we predict that the ETH to ETHPoW pair will become a popular pair after the split, at least until another interesting dynamic emerges. Looking forward to the race starting!
Abstract
In this article, we discuss the feasibility of splitting a new chain in an ethereum merger, resulting in an ETH2 Token and a new ETHPoW Token. In terms of Token prices and economic chain usage, it is almost certain that ETHPoW will be the one with minority support. While the ETHPoW chain may face many technical challenges and questions about its long-term viability, its existence may provide exciting opportunities for traders and speculators in the short to medium term.
Overview
After several delays, it appears that the merger will finally begin in September 2022. Tim Beiko, a core Ether developer, suggested Monday, September 19, 2022 as a possible merger date during a developer conference call on July 14, 2022. The first major part of the merger is to stop proof-of-work (PoW) mining. The consensus part of Ethernet chooses which blockchain to follow and will then move to an already existing proof-of-stake beacon chain. However, the date of September 19, 2022 is far from final, clients with merge time parameters have not yet been released, and until then, there is still a great deal of uncertainty about the exact timing of the merger.
After the merger, two Ether clients will need to be running, namely a consensus layer client and an execution layer client, such as Geth, which will still validate and process Ether smart contracts and transactions. It is worth pointing out that even after the merger, pledgers will not be able to withdraw their pledged Ether to the execution layer, and a "second merger" could take another 6 to 12 months.
When discussing the merger, many reported broad support in the Ether community for shutting down PoW. at a recent conference Vitalik mentioned that if someone didn't like it they could always use Ethereum Classic (i.e. ETC , a product of the 2016 DAO Wars). However, as expected, PoW miners will certainly not support the shutdown of PoW. why would they? They would be completely shut out of the Ether system. eip-1559 is nothing compared to that, and this time their possibility of getting revenue from Ether drops to zero. For months, some miners have been raising their voices behind the scenes against the merger and expressing a desire for "someone to step up and do something about it". Finally on July 29, 2022, one of the biggest players in China's mining ecosystem, "Bao Erji" (Guo Hongcai), indicated that he might plan to continue mining on the Ether PoW chain.
If the PoW chain still exists and continues to expand, there is speculation that such a coin could be called ETHPoW. Whether this chain makes any economic sense is an open question in our opinion. There is a view that the chain could exist for a long time. PoS may have some weaknesses compared to PoW (e.g. Staking derivatives becomes a natural monopoly) that ultimately make PoS chains less attractive than PoW chains in some use cases. All smart contract platforms competing with Ether (except perhaps ETC) have gone the way of PoS, so the emergence of a new PoW smart contract chain might gain a lot of traction. There are no real candidates other than ETHPoW.
In any case, amidst the nostalgia for the 2016/17 Bitcoin and Ether split era, ETHPoW looks like it might garner some interest from market participants.
Ice Age (Ice Age)
More than seven years ago, when Ether's PoS system was just a series of wacky and broken ideas on a drawing board, Vitalik already foresaw the potential problem. And to that end, he came up with a solution called 'Ice Age'. In this system, the difficulty of mining the network with PoW increases exponentially over time, and eventually it becomes impossible to scale the chain effectively. After the initial Frontier client, Ether's first major network upgrade was called 'Ice Age', which included the first difficulty bomb. This bomb was to 'detonate' in 2017 when the Serenity upgrade was to transition the network to PoS, but ultimately the PoS upgrade was delayed, and thus the bomb was delayed by the hard fork.
In fact, the difficulty bomb has been a 'dud' many times in the past. For example, in early October 2017, the average block out time for Ether was about 30 seconds, before the difficulty bomb system was reset and the average block out time dropped back to a normal 13 seconds or so. The difficulty bomb has been reset six times in Ether's history, with six hard forks.
The most recent reset was proposed in June 2022, and the bomb is now expected to 'detonate' in mid-September 2022, the perfect time to switch to PoS, just like the original plan back in 2015. While the bomb will be in September, based on the timing of previous bombs going off, the impact on average block spacing could take several months to become significant. Calculations estimate that it could take 175 days for the average block-out time to reach 30 seconds, after which the situation should deteriorate exponentially.
Another interesting factor is that this transition to PoS is 'really coming'. Compared to ETH, the price of ETHPoW is likely to be lower and may fluctuate dramatically. This may reduce the desire of miners to mine ETHPoW, so it could be very challenging to accurately assess the situation during the Ice Age.
The New ETHPoW Hard Fork Client
With the arrival of ice age, the previous PoW chain may only last a few hundred days beyond the fork. If the PoW chain is to survive long term, it will need to hard fork a new client to permanently remove the effect of ice age. This poses some problems for ETHPoW, which is perhaps the point of ice age. ETHPoW will not be able to claim to be orthodox or conform to the original rules of the chain. It would also require a hard fork. However, not many Ether users today probably really care about this, which seemed to be more valued seven years ago.
At the same time, any ETHPoW community will need to find developers with the technical expertise to write the new client. They also need to solve a schelling point problem, agree on a new client and new parameters to remove ice age and activate a hard fork. The community then needs to convince trading platforms and custodians to run and support this new client, which may be slightly more difficult than convincing them to continue running the old Geth node alongside the new ETH2 infrastructure. However, in practice, these issues can be easily overcome and the ETHPoW community is unlikely to be particularly large, so this should not be a major problem. There will probably be some large miners funding the entire operation behind the scenes.
ETH in locked pledges
Currently, there are about 13.2 million ETH pledged on the beacon chain, or close to 14 million if you include the actual balance (Ether obtained through pledges plus any deposits above the 32 ETH threshold). As far as we know, in the initial stages of the ETHPoW chain, these funds will be lost forever if a hard fork does not occur. In contrast, on the ETH2 chain, these ETH can be sent back to the execution layer at some point in the future. This has several consequences for the ETHPoW chain. First, one might argue that this could drive up the price of ETHPoW because there is a fraction less ETH available on the ETHPoW chain. Or, it could reduce the chain's credibility and hurt ETHPoW as users lose a lot of money.
If a new ETHPoW client is hard forked, the community will face a choice on what to do with the pledged ETH in order to solve the ice age problem. This is a dilemma. One possible outcome is that since it is a PoW coin, the community can lock the pledged Token forever. In the ETHPoW world, pledging is the wrong choice. The cumulative pledged proceeds of about 800,000 ETH gained at least before the merger should be deemed completely illegitimate on the ETHPoW chain. Therefore, if you are a verifier or own stETH, you may not receive additional revenue on the ETHPoW chain.
Stablecoin
Many people speculate that in the event of a controversial ethereum fork, the decision would no longer belong to the ethereum foundation or Vitalik. they believe that the new king makers in this case could be the custodians of Stablecoin. These custodians would have to choose a chain to support and, considering the popularity and prevalence of these Stablecoins and their interconnectedness with Defi, their decision would determine the winning chain. So perhaps it is Jeremy Allaire (CEO of Circle and issuer of USDC) who is the most powerful person in Ether, not Vitalik.
Of course, Jeremy is the CEO of a company that has to respond to his customers, and not doing so may mean he is not acting in the best interests of his shareholders, which may be illegal, so he may not really have that power in reality. However, if Circle is officially ordered to support one or the other chain for some regulatory reason, that's a different story. This is one of the potential weaknesses of Etherium at the moment.
If the merger results in a chain fork, it appears that Circle, Tether, Binance and other Stablecoin custodians will all support ETH2. So, even excluding strong support for ETH2 from the Ether Foundation and the community, the outcome of this split is clear: ETH2 will be the winner and ETHPoW will be the loser. On ETHPoW, many Defi Apps that rely on USD Stablecoin will collapse financially in a catastrophic way. However, there are other implications of this position of Stablecoin issuers, which we will discuss later in this article.
Selling ETHPoW
Many ethereum extremists strongly support the shift to PoS and therefore will not like ETHPoW. They probably want the ETHPoW chain to die out quickly.
Then there is a layer of thought on top of that. Ether maximalists should actually (somewhat perversely) want the ETHPoW chain to survive, at least for a while, so they can sell ETHPoW Token in the market and get more ETH (or dollars). This way they can make money from what they consider to be "stupid" ETHPoW supporters before ETHPoW slowly dies out in the next few years. As a result, many will likely sell their ETHPoW Token as quickly as possible and the price may weaken.
There is a third layer of thought on top of this, a third layer. What practically everyone should do (with or without Ether) is to buy ETHPoW Token as soon as possible after the merger happens. explained below.
The value of the ETH fork token
In order to sell ETHPoW for ETH, one needs to wait for a centralized trading platform to support ETHPoW after the merger. while centralized trading platforms like FTX and Binance may launch their products soon, it will still take some time, at least a few hours or days, to support ETHPoW deposits. No matter how well prepared they are, they will need to protect themselves from double-spend attacks as both the computing power and block-out times on ETHPoW may be unstable.
On the other hand, theoretically, no matter what happens, once the merger happens, users should be able to go to a centralized trading platform on the chain to buy ETHPoW. Regardless of your opinion of ETHPoW, do you definitely think that Token is better than all the other ERC-20 Tokens on the ETHPoW chain?
Let's think about some of the Tokens on Ether today.
USDC on ETHPoW - worthless because Circle will choose ETH2 and therefore the Token will not be redeemable, as mentioned above. USDT on ETHPoW - also worthless Wrapped Bitcoin on ETHPoW - worthless because the custodian will choose ETH2 and therefore the Token will not be redeemable for Bitcoin BNB on ETHPoW - worthless, because Binance will choose ETH2 Uniswap on ETHPoW - The long-term viability of Token on the ETHPoW chain is questionable. token may crash faster than ETHPoW stETH on ETHPoW - Since there is no collateral on this chain, these Token may be worthless, as discussed above All other ERC-20 Token on ETHPoW - may have very limited value on the ETHPoW chain Therefore, the best strategy may actually be to buy as many ETHPoW as possible before trading on a centralized trading platform and subsequently sell ETHPoW on the centralized trading platform. this is like a free call option on ETHPoW.
Merger Trading Strategies
As with these potentially controversial blockchain forks of the past, the Ether merger offers an exciting trading opportunity. One possible 'risk-free' trading idea is as follows.
before the merger, convert all your USD into USDC in your own Ether wallet
Immediately after the merger, sell your USDC on the ETHPoW chain and exchange it for ETHPoW Token on a centralized trading platform such as UniSwap or Curve
once the centralized trading platform opens ETHPoW deposits, sell all ETHPoW for USD
Gain profit
By making the above transactions, you can potentially make a profit with almost zero risk. Zero risk means that only certain types of risk (e.g. price movements) are taken into account.
Of course, the actual execution of the above trades is actually quite complex and risky, and there are several issues to manage.
Transactions need to be executed on short notice, as there may be a race to take advantage of the opportunity. The funds in the liquid pool supporting the sale of ETHPoW may dry up quickly. You will need to manage your own keys, rather than using a custodian. It is unlikely that any third-party custodians will support ERC-20 Token on ETHPoW soon after the split, if at all. Basically the infrastructure used to interact with the decentralized trading platform is likely to support merging and will only run on ETH2. Therefore, you may need to run your own Ether node and interact directly with the trading platform smart contracts on ETHPoW. For some traders, this can be quite complicated, but this difficulty is where profit opportunities may arise. Practice may be needed before the ETH1 fork. You may need to make sure that your USDC sell/swap orders are not made on the ETH2 chain again. It may be necessary to create split smart contracts. Liquidity providers may become aware of this potential risk very quickly and withdraw liquidity before and after the merge. However, some liquidity providers may not do so, thus creating opportunities. Many DeFi protocols rely on price predictions and it may not be clear how these will handle ETHPoW chains. There may be more advanced strategies to try in DeFi, including leveraging, lending or providing liquidity, which we will not discuss at this time.
Conclusion
Any chain fork that occurs at the time of the Ethernet merger could be an interesting return to the 2016/17 era. While ETHPoW faces many technical challenges, as long as the chain survives, there will be a positive narrative around its Token, and leading centralized trading platforms may open up their transactions. The crypto space is still full of narrative and noise. ETHPoW will bring a lot to get excited about, and we predict that the ETH to ETHPoW pair will become a popular pair after the split, at least until another interesting dynamic emerges. Looking forward to the race starting!
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