Ethereum’s long-awaited transition from a proof-of-work to proof-of-stake-based consensus system is just over the horizon, and the anticipation has created a bullish narrative for the smart-contract platform. That’s bittersweet for one very significant group: After the merge, current Ethereum miners will be left with immense amounts of computer hardware that will be much, much less useful.
But some miners are not going gently into that good night. On July 27, a longtime Ethereum investor and miner named Chandler Guo tweeted “ETH PoW coming soon”: a declaration, in brief, that Guo would lead his fellow miners to continue supporting the current proof-of-work based Ethereum chain after the system change known as the Merge.
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There are some rational arguments for a continued ETH PoW chain, and it would certainly be a fascinating experiment if it goes forward. But there are a lot more reasons to think the chain wouldn’t be viable in the long term – and a lot of ways that an ETH PoW continuation could be leveraged by disingenuous bad actors.
Double spending an entire blockchain
To understand both the potential and the risk of a post-merge “ETH PoW” chain, consider how the upcoming Merge will work, and what will be left behind. Very broadly, the historic state of the Ethereum chain at the time of the Merge, most crucial address balances, will be transferred to the new proof-of-stake consensus environment.
But the same state history will also still exist on the proof-of-work miners chugging away right up until the microsecond before the Merge. Those miners could fairly easily continue accepting transactions and adding blocks to their copy of the Ethereum chain using proof-of-work. It also means that they will still be rewarded by the pre-Merge PoW algorithm with tokens that look a lot like ETH, but exist only on the degraded proof-of-work chain.
Similarly, all ETH holders just before the Merge will have keys for tokens on both chains. Using them will likely involve some complexity – technical work or special tools – but many default applications like MetaMask will presumably remove integrations with the old chain to prevent user confusion. Also important: Only holders who self-custody are likely to retain control of their ETH PoW tokens. It’s likely that many custodial exchanges will not give users access to their tokens on the continued proof-of-work chain.
However, a major (if often unspoken) goal of Chandler Guo and his ETH PoW initiative would be to generate enough interest in ETH PoW that exchanges do list it and make it tradable as a token separate from ETH proper. While ETH PoW would likely be tradeable via decentralized exchanges sooner, mainstream centralized exchange listings would be key to maintaining broad market interest.
At the crudest level, this is where the money is for ETH PoW advocates. If they get enough exchange listings, it will effectively guarantee that there is at least some market value for both the tokens they already own and, perhaps more important, new ETH PoW tokens they mine post-Merge.
Just in case something goes very, very wrong
Of course, that’s got nothing to do with the actual usefulness of ETH PoW. Is there any reason for a proof-of-work version of Ethereum to continue to exist, other than to find a price for something that has lost most of its value overnight? What are the chances there will be actual user demand for ETH PoW that would lead to longer-term stable value or appreciation?
There are some non-financial arguments for continuing the proof-of-work chain as “ETH PoW” (or whatever they ultimately decide to call it, because “ETH PoW” frankly stinks). Above all, rational or not, there will be some uncertainty about the stability of the new Ethereum chain after the Merge. If something goes truly catastrophically bad with the Merge, there is some chance users, apps and even assets (see below) will migrate back to the PoW chain. In this scenario, positions on the “old” chain could act as something akin to insurance.
To be very clear, that chance is vanishingly small. There have been several Ethereum test merges at this point, and they’ve gone well. But the chance isn’t zero.
Longer-term, there remain some uncertainties about proof-of-stake as a sustainable security system for Ethereum. Most pointedly, there are ongoing concerns that over time, proof-of-stake leads to centralization by rewarding those who are already big holders. Governance manipulation is another perceived risk of proof-of-stake consensus mechanisms. The longer-term emergence of these or other flaws could lead players to migrate back to a proof-of-work version of Ethereum, which would raise the value of positions there.
Empty circles and severed tethers
There are, however, bigger and more obvious reasons that the ETH PoW chain will have little substantive value. In fact, it will likely be such a confusing and broken landscape that it could even be described as having negative value.
Above all, most of the assets and systems that people actually use on Ethereum would be effectively dead on the forked proof-of-work chain. Stablecoins denoted on the degraded chain won’t be honored by entities like Circle, for instance. That in itself would be enough to render DeFi systems on ETH PoW effectively unusable. (DeFi stands for decentralized finance, a grouping of apps that provide financial services without middlemen.)
But there’s an even bigger problem, especially for the period right after the Merge: The decentralized price oracles that make DeFi platforms functional, in particular for trading programmable assets, would be broken.
A second set of issues also confront the ETH PoW concept. In order to incentivize the proof-of-stake transition, Ethereum’s creators built in a time bomb. This so-called difficulty bomb is scheduled to effectively make the chain impossibly difficult to mine after the Merge, slowing transactions to a crawl.
To pull off its plan, the ETH PoW group would have to unify around yet another fork, this one to remove the difficulty bomb. This could prove truly challenging in the absence of the Ethereum Foundation and other leaders who often point the way on big Ethereum changes.
The ETH PoW group could also, in theory, work with stablecoin issuers and oracle maintainers to bring working versions of those products back to the ETH PoW chain. This would all require significant financial and coding resources, though. The ETH PoW advocates might well have the money to throw around, but talent is tougher: There is already a serious lack of skilled Ethereum developers, so recruiting devs to work on a decommissioned leftover might not be easy.
There’s a final reason to question whether ETH PoW would have real value: There already IS an alternate proof-of-work-based version of Ethereum. It’s called Ethereum Classic (ETC), and it emerged from the 2016 rollback of the Ethereum chain after the infamous DAO Attack.
In fact, ETC has experienced a major rally recently and has also seen rallies in the leadup to previous Ethereum upgrades, supporting the idea that there is some perceived value in a “backup” version of Ethereum.
But despite that, Ethereum Classic has gained limited traction among users since it split from Ethereum. Even after ETC’s recent rally, it only trades at about 10% of ETH’s value. Given that, it’s unclear why there would be any need for two proof-of-work versions of Ethereum.
Strangest of all, one prominent supporter of ETH Classic, at least rhetorically, was Kevin Guo – the man now spearheading the ETH PoW plan. At the time, he had great hopes, declaring that “Ethereum Classic will replace Ethereum Core.”
Maybe the second time’s the charm.
The world’s craziest trade
Given all the headwinds, I don’t believe an ETH PoW fork is likely to become a thriving or even truly viable ecosystem. But if it goes forward in even the most limited form, it will trigger a wave of truly bonkers speculative trading as people try to profit from the “free” tokens left behind by the fork.
One simple and helpful frame for traders considering their positions is the question of value distribution between the two chains. Kevin Zhou at Galois Capital, for instance, has predicted that while 96% of Ethereum’s value will stay with the new PoS chain, 4% might accrue to the new ETH PoW chain.
Beyond that, trying to make money from a hypothetical ETH PoW trade would truly be a game for only the most technically skilled players. As a recent, excellent BitMEX research piece explains, the transition would likely break nearly all the trading infrastructure that average traders are used to.
BitMEX suggests that extreme measures, up to the major undertaking of running your own entire Ethereum node, will be necessary to make an ETH PoW play. For anyone not instantly intimidated by that idea, BitMEX also lays out some interesting tactical options.
See also: Sell the Ethereum Merge | Opinion
Personally, as a decidedly non-expert trader, my plan for a hypothetical ETH PoW fork is extremely simple and beautifully lazy. First, I’ll be moving all my ether off exchanges and into local wallets to guarantee I hold the keys on both chains. Then I’ll hang on to my ETH PoW until a centralized exchange lists it.
Then I’ll dump most of it and buy myself a sandwich or a gold watch, and be happy with whichever it is.
Welcome to ETHPVP
As always, a big event also represents a big opportunity for scammers, and there are equally serious risks for novices on that front. Be aware that there should be very little reason for any ETH PoW advocate or group to ask for money for pretty much anything. After all, if it was a good idea, shouldn’t the PoW fork come with a sustainable community and organic demand to support further development?
The BitMEX report also contains what I think is the most honest assessment of the ETH PoW trade you’ll read anywhere:
“Ethereum maxis should actually (somewhat perversely) want the ETH PoW chain to survive, at least for a bit, so that they can dump ETH PoW coins into the market and get more ETH (or US$). That way they can make money from what they consider to be ‘stupid’ ETH PoW supporters, before ETH PoW dies a slow death over the next few years. Therefore, many people may try to sell their ETH PoW as fast as they can and the price may be weak.”
This may not be what’s truly in ETH PoW advocates’ hearts – I don’t know. But it will certainly be the attitude of many traders who join in.