Ethereum’s ‘The Merge’ will cause chaotic grab-and-dump campaign

This article is part of Crypto Insights, a segment by major crypto exchange Bybit that dives into the latest and most pertinent issues in the crypto space.

Ethereum’s protocol upgrade, known as The Merge, has been welcomed by most of the broader crypto communities, including its own. The upgrade may potentially increase the network’s security and will also be less energy-intense, reducing power consumption by roughly 10,000%.

The Merge, tentatively scheduled for mid-September, will change how transactions are confirmed on the blockchain by moving consensus from proof of work (PoW) to proof of stake (PoS). Unfortunately for Ethereum miners, this change will render their services obsolete.

Image credit: Timmy Loen

Not so fast, says semi-retired Chinese miner Chandler Guo, who plans to keep the old chain going through a hard fork. This means the entire blockchain, and all the assets on it, are copied and continue on a parallel chain. “About 60 developers are working on the fork to eliminate the so-called difficulty bomb in the existing Ethereum code,” according to BeInCrypto.

The difficulty bomb was planted in the initial iteration of Ethereum. When activated, it renders mining impossibly difficult, thus compelling miners and node operators to support the proof-of-stake version. This has since been successfully defused on the hard fork.

How much these duplicate NFTs and crypto tokens will be worth on Guo’s proposed blockchain, which may be called Ethereum PoW (ETHW), is anyone’s guess. But it is probably nothing close to the original assets that will continue on the Ethereum mainnet.

Indeed, the two largest stablecoins, Circle (USDC) and Tether (USDT), have confirmed they will support redemption only on the post-merge PoS Ethereum chain. Chainlink, the largest oracle provider, will likewise only support the PoS chain. Major wallet provider MetaMask has so far kept schtum on whether it will provide access to any forked chain.

However, this doesn’t mean that ETHW will be worth nothing. And if you have a large bag of ether (ETH), it will be copied and made available on the new chain, giving you an additional equal amount of ETHW that you could sell. Even if you only get a fraction of what your ETH bag is worth, it’s still free money, right?

Not so fast – it could be dangerous to speculate on ETHW. For example, there will be a high risk of falling prey to “replay attacks” where hackers can use a hard fork as an opportunity to simulate transactions and potentially drain your wallet. Not to mention the fact that liquidity on the new chain would be highly variable and result in high levels of slippage.

Even so, there are some players in the crypto space who are interested in trying to turn a profit from the copied tokens and ensuing volatility.

“A lot of tokens will be rendered worthless [on the new fork] without the support of communities and developer teams,” says a recent report from Bybit Crypto Insights and Nansen. “As such, the industry players deem the native token of Ethereum PoW, dubbed ETHW, as the most valuable token on the proposed hard fork with the backing of miners and a few CeFi players.”

Therefore, some market makers might increase their holdings of ETH in the run-up to the fork so they can maximize their haul of the ETHW tokens that are provided on the new chain at a 1:1 ratio. However, according to Nansen data accessed by Bybit Crypto Insights, there’s more evidence in favor of institutional players and “smart money” accumulating ETH for long-term investment in the new PoS chain instead of trying to capitalize on the hard fork.

If there are any profits to be made by selling free ETHW tokens, they will come to those who can access and dump the tokens the fastest, which tilts the balance in favor of highly sophisticated market actors who can run bots and individual clients who access smart contracts directly. Wallet infrastructure may limit retail traders, and that’s if major wallet providers even allow access to the unstable new chain.