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Ethereum's long-awaited switch from a proof-of-work-based to a proof-of-stake-based consensus system is just around the corner, and the smart-contract platform has been given a positive spin because of this. This is bittersweet for one very important group: after the merge, current Ethereum miners will be left with a huge amount of computer hardware that will be much, much less useful.
But some miners are not going to sleep quietly. Chandler Guo, a longtime Ethereum investor and miner, tweeted on July 27: "ETH PoW coming soon." This was a short way of saying that Guo would lead his fellow miners to keep supporting the current proof-of-work-based Ethereum chain after the Merge, a change in the system.
There are some good reasons to keep the ETH PoW chain going, and it would be a very interesting experiment if it did. But there are a lot more reasons to think that the chain wouldn't work in the long run, and there are a lot of ways that dishonest bad actors could take advantage of an ETH PoW continuation.
A whole blockchain can be spent twice
Think about how the upcoming Merge will work and what will be left behind. This will help you understand both the potential and the risk of a "ETH PoW" chain after the Merge. In a broad sense, the most important address balances and the history of the Ethereum chain at the time of the Merge will be moved to the new proof-of-stake consensus environment.
But the same state history will still exist on the proof-of-work miners working up until the last microsecond before the Merge. Using proof-of-work, those miners could keep accepting transactions and adding blocks to their copy of the Ethereum chain. It also means that they will still get tokens that look a lot like ETH from the pre-Merge PoW algorithm, but they will only exist on the degraded proof-of-work chain.
In the same way, everyone who owns ETH right before the Merge will have the keys to tokens on both chains. Using them will probably require some technical work or special tools, but many default apps, like MetaMask, will probably remove integrations with the old chain to keep users from getting confused. Also important: Only people who self-custody their ETH PoW tokens are likely to keep control of them. On the continued proof-of-work chain, it is likely that many custodial exchanges will not let users access their tokens.
But Chandler Guo and his ETH PoW project have a major (but not always stated) goal of getting enough people interested in ETH PoW so that exchanges list it and make it tradeable as a token separate from ETH. Even though ETH PoW would probably be able to be traded on decentralized exchanges sooner, it would be important for it to be listed on major centralized exchanges to keep the market interested.
At the most basic level, this is where people who support ETH PoW see the money. If they get enough exchange listings, they can be sure that the tokens they already own and, perhaps more importantly, the new ETH PoW tokens they mine after the Merge will have at least some market value.
Just in case something really bad happens
Of course, that has nothing to do with whether or not ETH PoW is useful. Is there any reason for a proof-of-work version of Ethereum to still exist, other than to find a price for something that lost most of its value overnight? How likely is it that real people will want to use ETH PoW, which would lead to its value staying stable or going up in the long run?
There are some reasons that don't have to do with money to keep the proof-of-work chain going as "ETH PoW" (or whatever they end up calling it, because "ETH PoW" stinks). Above all, there will be some doubt, whether it's reasonable or not, about how stable the new Ethereum chain will be after the Merge. There is a chance that users, apps, and even assets (see below) will move back to the PoW chain if the Merge goes horribly wrong. In this case, having a place on the "old" chain could be like having insurance.
To be clear, that chance is almost non-existent. At this point, there have been several test merges of Ethereum, and they've all gone well. But there isn't no chance.
In the long run, there are still some questions about whether proof-of-stake will be able to keep Ethereum safe. Most importantly, there are still worries that, over time, proof-of-stake will lead to centralization because it rewards people who already have a lot of coins. People also think that governance can be changed with proof-of-stake consensus mechanisms. If these or other bugs show up in the long run, players might move back to a proof-of-work version of Ethereum, which would make positions there worth more.
Circles of nothing and broken ties
But there are bigger and more obvious reasons why the ETH PoW chain won't be worth much. In fact, the landscape will probably be so confusing and broken that it could be said to have negative value.
Most of the assets and systems that people actually use on Ethereum would stop working on the proof-of-work chain, which is the most important point. Stablecoins that were recorded on the degraded chain won't be accepted by companies like Circle. That alone would be enough to make DeFi systems that use ETH PoW pretty much useless. (DeFi stands for "decentralized finance," which is a group of apps that provide financial services without middlemen.)
But there's an even bigger problem, especially right after the Merge: the decentralized price oracles that make DeFi platforms work, especially for trading programmable assets, would stop working.
The ETH PoW idea also has to deal with a second set of problems. So that people would want to switch to proof-of-stake, the people who made Ethereum built in a time bomb. This so-called "difficulty bomb" will make it impossible to mine the chain after the Merge, which will slow transactions to a crawl.
The ETH PoW group would have to agree on yet another fork, this one to remove the difficulty bomb, in order to carry out its plan. This could be very hard to do without the Ethereum Foundation and other leaders who often show the way when big changes are made to Ethereum.
In theory, the ETH PoW group could also work with stablecoin issuers and oracle maintainers to bring working versions of these products back to the ETH PoW chain. All of this, though, would require a lot of money and coding resources. The people who support ETH PoW might have a lot of money, but it might be harder to find talented people. There are already not enough skilled Ethereum developers, so getting developers to work on a decommissioned project might not be easy.
One more thing makes me wonder if ETH PoW would have real value: There is already a version of Ethereum that is based on proof-of-work. It's called Ethereum Classic (ETC), and it came about when the Ethereum chain was rolled back in 2016 after the well-known DAO Attack.
In fact, ETC has recently gone up a lot, and it has also gone up before previous upgrades to Ethereum. This suggests that people think there is some value in a "backup" version of Ethereum.
Even so, the number of people using Ethereum Classic hasn't grown much since it split from Ethereum. Even after ETC's recent rise, it is still worth only about 10% as much as ETH. Given this, it's not clear why there would be a need for two proof-of-work versions of Ethereum.
Strangest of all, Kevin Guo, who is now leading the ETH PoW plan, was at least rhetorically a big fan of ETH Classic. He had high hopes at the time and said, "Ethereum Classic will replace Ethereum Core."
The second time might be the charm.
The strangest trade in the world
I don't think an ETH PoW fork is likely to become a thriving or even truly viable ecosystem, given all the problems. But if it goes forward in even the most limited way, it will cause a wave of crazy speculative trading as people try to make money off the "free" tokens left behind by the fork.
The question of how the value is split between the two chains is a simple and helpful way for traders to think about their positions. Kevin Zhou at Galois Capital, for example, thinks that the new PoS chain will keep 96 percent of Ethereum's value, while the new ETH PoW chain might get 4 percent.
Beyond that, trying to make money from a hypothetical ETH PoW trade would be a game that only the most technically skilled players could win. According to a recent, very good BitMEX research piece, the change would probably break almost all of the trading infrastructure that most traders are used to.
BitMEX says that if you want to make an ETH PoW play, you will have to go to great lengths, even if that means running your own entire Ethereum node. BitMEX also gives some interesting strategies for people who aren't scared off by this idea right away.
As a trader who is definitely not an expert, my plan for a possible ETH PoW fork is very simple and wonderfully lazy. First, I'll move all of my ether off of exchanges and into local wallets to make sure I have the keys to both chains. Then I'll keep my ETH PoW until it's listed on a centralized exchange.
Then I'll get rid of most of it and either buy a sandwich or a gold watch, and I'll be happy with either one.
Hello, and welcome to ETHPVP!
A big event is always a big chance for scammers, and there are serious risks for people who haven't done this before. Be aware that there shouldn't be many reasons for anyone or any group that supports ETH PoW to ask for money for almost anything. After all, if it was a good idea, the PoW fork should come with a stable community and natural demand to support more growth, right?
The BitMEX report also has what I think is the most honest assessment of the ETH PoW trade you'll read anywhere:
"In a strange way, Ethereum maxis should want the ETH PoW chain to last, at least for a little while, so they can dump ETH PoW coins on the market and get more ETH (or US$). So, they can make money off of people they think are "stupid" for supporting ETH PoW, before ETH PoW slowly dies over the next few years. Because of this, a lot of people may try to sell their ETH PoW as quickly as they can, which could make the price drop.
I don't know if this is what ETH PoW supporters really want. But that will be the way many traders feel when they join in.
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