ETHPoW vs ETH2: Discussing the possibility of a fork in the ETH merge

Summary

This article discusses the potential new chain forks that may arise during the Ethereum merge, resulting in the possibility of two tokens: ETH2 and ETHPoW. In terms of token prices and chain usage, ETHPoW is likely to receive support from only a small number of people. Although the ETHPoW chain faces numerous challenges in terms of technology and long-term viability, its existence may provide exciting opportunities for traders and speculators in the short to medium term.

Overview

Ethereum is expected to undergo a merge in September 2022, with the first step being the cessation of proof of work (PoW) mining, transitioning to the existing proof of stake (PoS) beacon chain. After the merge, two Ethereum clients will need to run: the consensus layer and the execution layer. It is worth noting that after the merge, stakers will still not be able to withdraw staked Ether to the execution layer, which may take another 6-12 months.

Although the Ethereum community generally supports the shutdown of PoW, PoW miners clearly will not support it, as they will be completely excluded from the Ethereum system. Some miners have been opposing the merge behind the scenes, and ultimately one of the main participants in the Chinese mining ecosystem has stated that they may continue mining on the Ethereum PoW chain.

If the PoW chain continues to exist, it is speculated that it may be called ETHPoW. Whether this chain has economic significance remains uncertain. Some believe that PoW may be more attractive in certain use cases compared to PoS. In any case, ETHPoW may attract the interest of market participants.

冰河期(Ice Age)

Ethereum foresaw this potential problem early on and proposed the "Ice Age" solution. In this system, the difficulty of the PoW mining network increases exponentially over time, ultimately making it impossible to effectively scale the chain. The difficulty bomb has been reset 6 times in Ethereum's history. The most recent reset was in June 2022, and the bomb is expected to "detonate" in mid-September 2022, which coincides with the switch to PoS.

New ETHPoW Fork Client

With the arrival of the ice age, previous PoW chains may only survive for a few hundred days after a fork. If PoW chains are to exist long-term, a hard fork of a new client is needed to permanently remove the effects of the ice age. This presents some issues for ETHPoW, to some extent undermining its legitimacy. The ETHPoW community needs to find technical experts to write a new client, reach consensus on the new parameters, and persuade exchanges and custodians to run and support this new client.

ETH locked in staking

Currently, there are about 13.2 million ETH staked on the Beacon Chain. On the ETHPoW chain, if no hard fork occurs, these funds will be permanently lost. In contrast, on the ETH2 chain, these ETH can be sent back to the execution layer in the future. This has several implications for the ETHPoW chain: it could potentially drive up the ETHPoW price or undermine the chain's credibility. If a new client is forked, the community will face the decision on how to handle these staked ETH.

Stablecoin

Many speculate that if a controversial Ethereum fork occurs, the decision will rest with the custodians of Stablecoins. They will have to choose which chain to support, and their decision will determine the winning chain. Currently, it appears that major Stablecoin issuers are likely to support ETH2. Many DeFi applications that rely on dollar Stablecoins will economically collapse on ETHPoW.

Sell ETHPoW

Many Ethereum extremists strongly support the transition to PoS and therefore may not like ETHPoW. However, from another perspective, they might hope that the ETHPoW chain can survive for a while, allowing them to sell ETHPoW tokens for profit. As a result, many may sell ETHPoW tokens as soon as possible, which could lead to weak prices.

Value of ETH Fork Tokens

Theoretically, once the merge occurs, users should be able to purchase ETHPoW on decentralized trading platforms on the chain. Compared to other ERC-20 tokens on the ETHPoW chain, ETHPoW tokens could be the most valuable. This is because most ERC-20 tokens may be worthless on the ETHPoW chain, including USDC, USDT, Wrapped Bitcoin, etc.

Merge Trading Strategy

The ETH merge presents a trading opportunity. One possible "risk-free" trading idea is:

1. Exchange USD for USDC in your wallet before the merge.
2. Immediately sell USDC on the ETHPoW chain after the merge, in exchange for ETHPoW tokens
3. After the centralized exchange opens ETHPoW deposits, ETHPoW will be sold for USD.
4. Obtain profits

This strategy carries some risks and challenges, requiring quick execution, self-management of keys, and direct interaction with smart contracts. Liquidity providers may quickly realize the risks and withdraw liquidity.

Conclusion

Any chain fork during the ETH merge may be an interesting return to the 2016/17 era. Although ETHPoW faces many technical challenges, as long as the chain survives, there will be positive narratives around its tokens. We predict that the trading pair of ETH against ETHPoW will become a popular trading pair after the fork, at least in the short term.