Analysis of the value and success probability of the Ethereum fork Token

Summary

  • In this article, we discussed the feasibility of splitting new chains when Ethereum merges, resulting in an ETH2 token and a new ETHPoW token.
  • In terms of token price and economic chain usage, it is almost certain that ETHPoW will be the chain supported by the minority.
  • While the ETHPoW chain may face many technical challenges and have issues with long-term viability, its existence may offer exciting opportunities for traders and speculators in the short to medium term.

Overview

After several delays, it appears that Ethereum will finally start merging in September 2022. Ethereum core developer Tim Beiko suggested Monday, September 19, 2022 as a possible merge date during the July 14, 2022 developer conference call. The first major part of the merger is to stop proof-of-work (PoW) mining. The consensus part of Ethereum chooses which blockchain to follow and will then move to the already existing Proof of Stake beacon chain. However, the date of September 19, 2022 is far from finalized, the client with the merge time parameter has not been released, and until then, there is still a lot of uncertainty about the exact timing of the merger.

After the merger, two Ethereum clients need to be running, a consensus layer client and an execution layer client, such as Geth, which will still validate and process Ethereum smart contracts and transactions. It’s worth pointing out that even after the merger, stakers cannot withdraw their staked ETH back to the execution layer, and a “second merger” could take another 6 to 12 months.

When discussing the merger, many reported that the Ethereum community broadly supported the shutdown of PoW. At a recent conference Vitalik mentioned that if someone doesn’t like it, they can always use Ethereum Classic (ie ETC, a product of the 2016 DAO Wars). However, as one might expect, PoW miners will certainly not support closing PoW. Why do they do this? They will be completely shut out of the Ethereum system. EIP-1559 is nothing compared to that, this time their chances of earning from Ethereum are down to zero. For months, some miners have been speaking out against the merger behind the scenes, expressing a desire for “who can come forward and do something.” Finally, on July 29, 2022, one of the largest players in the Chinese mining ecosystem, “Bao Er Ye” (Guo Hongcai), indicated that he may plan to continue mining on the Ethereum PoW chain.

Analysis of the value and success probability of Ethereum forked Token

If the PoW chain still exists and continues to expand, there is speculation that the coin could be called ETHPoW. Whether this chain makes any economic sense is an open question in our view. There is a view that the chain can exist for a long time. PoS may have some weaknesses compared to PoW (such as staking derivatives becoming a natural monopoly) that ultimately makes PoS chains less attractive than PoW chains for some use cases. All smart contract platforms competing with Ethereum (except perhaps ETC) have gone the PoS path, so the emergence of a new PoW smart contract chain may gain a lot of traction. Apart from ETHPoW, there are no other real candidates.

Regardless, in the nostalgia for the 2016/17 Bitcoin and Ethereum split, ETHPoW looks like it might spark some interest from market participants.

Ice Age

Vitalik had foreseen this potential problem more than seven years ago, when Ethereum’s PoS system was just a series of wacky and broken ideas on a drawing board. And came up with a solution for this, called “Ice Age”. In this system, the difficulty of PoW mining the network increases exponentially over time, eventually failing to scale the chain efficiently. After the original Frontier client, Ethereum’s first major network upgrade, dubbed “Ice Age,” included the first difficulty bomb. This bomb will “detonate” in 2017, when the Serenity upgrade will transition the network to PoS. But eventually the PoS upgrade was delayed, so the bomb was delayed by the hard fork.

In fact, the difficulty bomb has become a “dud bomb” many times in the past. For example, in early October 2017, the average block time of Ethereum was about 30 seconds, after which the difficulty bomb system was reset, and the average block time fell back to the normal 13 seconds. The difficulty bomb has reset 6 times in the history of Ethereum, with six hard forks.

Analysis of the value and success probability of Ethereum forked Token

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, as originally planned back in 2015. While the bomb will be in September, based on the timing of previous bomb blasts, it could take several months for the impact on the average block interval to become noticeable. Calculations estimate that it could take 175 days for the average block time to reach 30 seconds, after which things should get exponentially worse.

Another interesting factor is that this transition to PoS is “really coming”. Compared to ETH, the price of ETHPoW may be lower and it may be highly volatile. This may reduce the desire of miners to mine ETHPoW, so it can be very challenging to accurately assess Ice Age conditions.

New ETHPoW hard fork client

With the arrival of ice age, the previous PoW chain may only survive for a few hundred days after the fork. If the PoW chain is to exist for a long time, it needs to hard fork a new client to permanently remove the effect of ice age. This creates some problems for ETHPoW, and maybe that’s what ice age is for. It negates the legitimacy of ETHPoW to a certain extent. ETHPoW will not be able to claim to be the orthodox or original rules chain. It also requires a hard fork. However, there may not be many Ethereum users today who really care about this, which seemed to be more valued seven years ago.

At the same time, any ETHPoW community needs to find developers with technical expertise to write new clients. They also need to solve a schelling point, agree on a new client and new parameters to remove the ice age and activate the hard fork. The community then needs to convince exchanges and custodians to run and support this new client, which may be slightly harder than convincing them to keep running the old Geth nodes alongside the new ETH2 infrastructure. In practice, however, these issues can be easily overcome, and the ETHPoW community is unlikely to be particularly large, so this should not be a major issue. Perhaps there will be some large miners behind the scenes to fund the entire operation.

ETH in locked stake

Currently, there are approximately 13.2 million ETH staked on the Beacon Chain, which is closer to 14 million if the actual balance (Ethereum earned through staking plus any deposits above the 32 ETH threshold) is included. From what we understand, in the initial stages of the ETHPoW chain, if a hard fork does not occur, these funds will be lost forever. By contrast, on the ETH2 chain, these ETHs 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 think that this could push the price of ETHPoW higher due to a fraction of the ETH supply on the ETHPoW chain. Alternatively, this could reduce the trustworthiness of the chain and harm ETHPoW as users lose large amounts of funds.

If a new ETHPoW client is hard forked, the community will be faced with a choice on what to do with these pledged ETH in order to solve the ice age issue. This is a dilemma. One possible outcome is that since it is a PoW coin, the community can lock the staked Token forever. In the ETHPoW world, staking is the wrong choice. At least the cumulative staking proceeds of around 800,000 ETH earned prior to the merger should be considered completely illegal on the ETHPoW chain. Therefore, if you are a validator or own stETH, you may not get additional benefits on the ETHPoW chain.

Stablecoins

Many speculate that in the event of a controversial Ethereum fork, the decision will no longer belong to the Ethereum Foundation or Vitalik. They believe that the new kingmaker in this case may be the custodian of Stablecoin. These custodians must choose a chain to support, and considering the popularity and popularity of these stablecoins, and how interconnected they are with Defi, their decision will determine the winning chain. So maybe Jeremy Allaire (Circle CEO, USDC issuer) is the most powerful person in Ethereum, not Vitalik.

Of course Jeremy is the CEO of a company and he has to be responsive to his clients, failing to do so may mean he is not acting in the best interests of shareholders, which may be illegal, so he may not really be in reality this power. However, if officials ordered Circle to support one chain or the other for some regulatory reason, that would be a different story. This is also a potential weakness for Ethereum right now.

Circle, Tether, Binance, and other Stablecoin custodians all appear to support ETH2 in the event of a chain fork after the merger. So even excluding the strong support of ETH2 from the Ethereum 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 economically in catastrophic fashion. However, there are other implications of this stance for Stablecoin issuers, which we will discuss later in this article.

Sell ​​ETHPoW

Many ethereum extremists strongly support the move to PoS and therefore would not like ETHPoW. They probably want the ETHPoW chain to die quickly.

Then there is a layer of thought on top of that. Ethereum maximalists should actually (somewhat perversely) hope that the ETHPoW chain survives, at least for a while, so they can sell the ETHPoW token in the market and get more ETH (or USD). This way they can make money from what they consider “dumb” ETHPoW supporters before ETHPoW slowly dies in the next few years. As a result, many may sell their ETHPoW tokens as fast as possible, and prices may soften.

On top of this there is a layer of thought, a third layer. Actually what everyone should do (with or without Ethereum) is to buy ETHPoW tokens as soon as possible after the merger happens. It will be explained below.

The value of the ETH fork token

In order to sell ETHPoW to get ETH, one needs to wait for the centralized exchange to support ETHPoW after the merger. While centralized exchanges like FTX and Binance may launch related 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 need to protect themselves from double-spending attacks as hash power and block times can be volatile on ETHPoW.

On the other hand, users should be able to buy ETHPoW on the chain DEX once the merger happens, in theory no matter what happens. Regardless of your opinion on ETHPoW, surely you think this token is better than all other ERC-20 tokens on the ETHPoW chain?

Let’s think about some of the tokens on Ethereum today:

  • USDC on ETHPoW – worthless because Circle will choose ETH2, so the token will not be redeemable, as stated above.
  • USDT on ETHPoW – also worthless
  • Wrapped Bitcoin on ETHPoW – worthless as the custodian will choose ETH2, so the token will not be redeemable for bitcoin
  • BNB on ETHPoW – worthless as Binance will choose ETH2
  • Uniswap on ETHPoW – The long-term viability of tokens on the ETHPoW chain is questionable. Tokens may crash faster than ETHPoW
  • stETH on ETHPoW – Since there is no collateral on this chain, these tokens may be worthless as described above
  • All other ERC-20 tokens on ETHPoW – may have very limited value on the ETHPoW chain

So the best strategy might actually be to buy as much ETHPoW as possible before trading on a centralized exchange. ETHPoW is then sold on centralized exchanges. It’s like a free call option on ETHPoW.

Consolidation Trading Strategy

Like these potentially controversial blockchain forks in the past, the ethereum merger presents an exciting trading opportunity. A possible “risk-free” trade idea is as follows:

1. Convert all your USD to USDC in your own Ethereum wallet before merging

2. Immediately after the merger, sell your USDC on the ETHPoW chain and exchange it for ETHPoW Token on the decentralized trading platform such as UniSwap or Curve

3. Once the centralized exchange opens ETHPoW deposits, sell all ETHPoW for USD

4. Make a profit

With the above trades, you have the potential to make a profit with almost zero risk. Zero risk is when only certain types of risk (such as price movements) are considered.

Of course, actually executing the above transaction is actually quite complex and risky, and there are several issues to manage:

  • Transactions need to be made within a short period of time as there may be a race to take advantage of the opportunity. The liquidity pools supporting the sale of ETHPoW may dry up quickly.
  • Instead of using a custodian, you need to manage your own keys. If anything, it is unlikely that any third-party custodian will support ERC-20 tokens on ETHPoW soon after the split.
  • Basically the infrastructure used to interact with DEXs is likely to support mergers and only run on ETH2. Therefore, you may need to run your own Ethereum node and interact directly with the trading platform smart contracts on ETHPoW. This can be quite complicated for some traders, but this difficulty is where profit opportunities may arise. Practice may be required before ETH1 forks.
  • You may want to make sure that your USDC sell/swap order does not happen again on the ETH2 chain. May need to create split smart contracts.
  • Liquidity providers may realize this potential risk and withdraw liquidity very quickly before and after the merger. However, some liquidity providers may not do so, creating an opportunity.
  • Many DeFi protocols rely on price oracles, and it may not be clear how these will handle the ETHPoW chain.

There may be more advanced strategies to try in DeFi, including leverage, borrowing or providing liquidity, which we will not discuss for now.

in conclusion

Any chain fork that happens when Ethereum merges could be an interesting throwback 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 exchanges may open up its trading. The crypto space is still full of narrative and noise. ETHPoW will bring a lot of excitement, and we predict that the ETH/ETHPoW pair will become a popular pair after the split, at least until another interesting dynamic emerges. Looking forward to the start of the game!

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/analysis-of-the-value-and-success-probability-of-the-ethereum-fork-token/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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