Galois Capital: What will happen after Ethereum merges?

This post is my answer to yesterday’s questionnaire about the ETH merger. In addition, position disclosure: At present, we hold ETH spot, short ETH quarterly contract, the scale is similar.

Who will the miners support?

It depends on the price of ETC vs the expected price of ETH1, but I guess ETH1 is worth more. Fundamentally, ETH1 has more infrastructure and contracts than ETC, which is an advantage, but also experiences chaos in DeFi when it forks, which is a disadvantage.

After the chaos subsides, ETH1 may retain more value than ETC, because the steady state of ETH1 is actually what we see now, except without the application development and oracles, and without the likes of USDC, WBTC, USDT (probably) , most NFTs and other non-copyable assets.

Is it very likely that USDT will choose ETH1 instead of ETH2?

is great. While USDT (followed by USDC and WBTC) are most likely to choose ETH2, they also have a good chance of choosing ETH1. First of all, Tether/Bitfinex does not want to take legal responsibility or lawsuits on its own.

If PoS has flaws or vulnerabilities that are not detected on the testnet, this could hold the stablecoin issuer liable, but with ETH1, they are fully aware of it. At the same time, someone will definitely try to redeem USDT on ETH1, and if there is a problem with this process, they will most likely take the stablecoin issuer to court. While that’s pointless, it’s a cheap and highly rewarding option (if successful).

Additionally, Tether/Bitfinex users are mostly BTCists and have strong ties to Asia, where Asian miners have meaningful influence. If there was a way for stablecoin issuers to join ETH2 some time after the merger, that would reduce their risk – but that’s not possible, they would have to make a decision when blocks are merged. In my opinion, the probability of USDT choosing ETH1 over ETH2 is between 2% and 5%.

How do exchanges handle contracts and options?

Probably most will choose ETH2 because it is easier than doing a basket of indices, and the three major exchanges with margin positions (Kraken, Bitfinex, Poloniex) each choose to approach this differently.

Between borrowers, lenders, longs and shorts, some of them chose to go short, and each exchange chose a different role.

How to do a basket index? Just think of it as an ETF with two equally weighted components, similar to FTX’s ALT and SHIT indices.

By the way, let’s talk about borrowing. There are usually triggers here after which the forked asset has to be repaid. Unfortunately or fortunately, one of the standard forks explicitly references the hash rate.


Also, legally, depending on the language, you can make the argument that ETH1 is the main chain and ETH2 is the airdrop/fork, at which point both must be returned to the lender.


What will happen to stETH?

It will be zeroed on ETH1. stETH cannot be redeemed for ETH on ETH1. Therefore, the greater the expected value of ETH1, the greater the difference to stETH. This spread has widened over the past day.

There are other considerations for the stETH discount, but now there is one more factor. Roughly speaking, I think the 2% illiquidity discount offsets the yield, and the 4% discount on ETH1 seems fair at the moment. So in my current view, there’s a total of 6% off.

We have a lot of other topics to talk about, historically, whether forks add value or destroy value, especially in this case, on oracles solving DeFi problems, on oracles for price discovery in CeFi, in The same is true for the issue of on-chain lending pools. The liquidation of the two forks, the AMMs and MEVs of the two forks, the domain name, and finally the question of why ETH1 exists may end up in ETH2’s favor.

Posted by:CoinYuppie,Reprinted with attribution to:
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