The Ethereum “merge” is approaching. Some miners are now announcing that they will get the old Ethereum with Proof of Work as “ETHPow”. This is only possible with a chain split: each coin doubles on a parallel blockchain. This does not pose a serious threat to Ethereum – but traders will be delighted.
In the meantime, it seems to have been decided that Ethereum will complete the “ merge ” in September. With this, Ethereum will switch from Proof-of-Work (PoW) to Proof-of-Stake (PoS) : Miners will no longer be necessary to secure the block chain.
However, it also seems certain that this major event will be somewhat jerky.
“ETH will be fork, ETHPOS vs ETHPOW,” Chandler Guo wrote in a chat group: Ethereum will be forked, Proof of Stake will compete against Proof of Work.
With this short comment, one of the more important Chinese crypto miners confirms what everyone expected: the miners do not simply accept that the Ethereum developers will “fire” them with the merge . Because the merge makes Ethereum the “Proof of Stake” blockchain: ETH 2.0
The miners defend themselves passively. They just pretend that there is no merge and that there never was a roadmap that firmly plans the move to PoS. They just carry on as before. While the stakers work with ETH2, the miners will use the power of their graphics cards to update the classic Ethereum blockchain: ETHPoW.
BitMEX Research, an information portal of the BitMEX exchange, dedicates a report worth reading to this chain split.
Not a competitor for ETH2, but potentially relevant nonetheless
Basically, there is a consensus in the Ethereum scene that the blockchain is changing from PoW (mining) to PoS (staking). This was always planned and, according to the roadmap, is long overdue.
However, one can understand that the miners do not just watch their earnings from Ethereum mining drop to zero. Since there are no other PoW blockchains to base their hardware on, graphics cards, fans, power supplies, and Ascis will become useless by September. It's hard to overestimate the amount of hardware currently in use: According to the Digiconomist , Ethereum is currently running at almost 10 gigawatts and consumes more than 80 terawatt hours a year.
If a graphics card draws up to 500 watts under full load, that would be around two million graphics cards. Of course, Digiconomist numbers are traditionally on the high end; you can safely halve them. In Ethereum, Asics are also partly digging. But the mining algorithm is relatively robust against Asics , which is why mining is likely to continue to be dominated by GPUs. So we would have an order of magnitude: A six or very low seven-digit number of graphics cards is disconnected from the power supply. Gamers should await the merge with anticipation, graphics card manufacturers, especially Nvidia, with horror.
For ETHPoW this means: There are parties that have an economic interest in ETHPoW not becoming a failure. Therefore, it is likely that the blockchain will survive.
However, the analysts at BitMEX remain skeptical as to whether ETHPoW will achieve “any economic significance”. The broad and agile ecosystem around Ethereum and all relevant developers are unanimously on the side of ETH2. ETHPoW could become one of the many zombie chains: a cryptocurrency that somehow continues to exist despite not having a living ecosystem on top.
Nevertheless, ETHPoW could also enjoy a certain relevance in the long term. Maybe Proof of Stake has a weakness. Maybe there is a bug, maybe there are unfortunate tendencies, like a monopolization of block production. The merge is a big experiment and ETHPoW could set itself up as a backup in case something goes wrong or has unexpected consequences.
Hairy problems with tokens
However, BitMEX Research also recognizes problems that miners are dealing with with ETHPoW.
First of all, the "Ice Age". The Ethereum developers program a “ Difficulty Bomb ” with every major upgrade. This is an algorithm that, from a certain point in time, increases the difficulty of mining exponentially. This is hardly noticeable at first, but freezes the blockchain completely after a few months. Without changes to the code, according to BitMEX, ETHPoW would not remain more than 100 days.
To avert the Ice Age, ETHPoW must also perform a hard fork. That would be uncontroversial. But miners need to find and fund developers to change the code and keep the quality of the client at a level that convinces exchanges to list the coin for trading. Since an Ethereum full node is anything but trivial software, this challenge should not be underestimated.
A tricky problem is the ethers that have been frozen in a smart contract to stake ETH2 today. These will be put back into circulation (at some point) after the merge. But what happens to them on ETHPow? With a hard fork, you could theoretically book them back. But whether this is desired should provide a topic for discussion. And what about the tokens issued based on the staked ethers? If they become worthless as there is no merge – what happens to the DeFis where it was used as collateral?
And that brings us to the huge tuft of hair in the soup of ETHPoW: the stablecoins. Very large parts of the ecosystem on Ethereum are based on stablecoins such as USDC (Circle) or USDT (Tether) . These stablecoins circulate to tokens on the Ethereum blockchain and are backed 1:1 by dollars in a bank account. At least that's what they say. The tokens are doubled with the fork: A tether dollar on ETH now exists on ETH2 and ETHpoW. However, since the dollar in the bank account does not double, the issuers of the stablecoins have to opt for a blockchain.
Therefore, it is also said that Tether and Circle decided on the hard fork. Since it is considered impossible that they will not choose ETH2, almost $100 billion will disappear from the ETHPoW ecosystem at once. Every DeFi app and DAO will collapse completely, which is going to get pretty wild. It's dizzying to think about the inevitable tsunami of automated liquidations.
Fun and profit for traders
As long as there is no catastrophic bug in ETH2, BitMEX research has no doubt that ETH2 will prevail. The whole orchestra plays on this stage and that's really all that matters.
Nevertheless, BitMEX assumes that "positive narratives" can form around ETHPow and that large exchanges will list the coin at an early stage. It is conceivable that the fork will trigger enthusiasm among users and traders. Therefore, there will be “exciting opportunities for traders and speculators” (and the possibility alone should keep the coin alive).
Users who hold Ether can look forward to receiving another coin for free with the fork. Everyone will have to decide for themselves whether to sell it immediately with a small profit or speculate that it will increase in value over time. But one thing is clear: it will be exciting!
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