Ethereum Proof-of-work Fork Proposal is “a Retail Trap,” Researchers Say

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  • All EVM-com­pat­i­ble layer‑1 net­works such as Avalanche’s C‑chain and Polygon’s PoS chain forked the open-source Ethereum client soft­ware, but not the trans­ac­tion history
  • Min­ers and a few exchanges stand to prof­it from the chaos expect­ed to ensue

Min­ers on the Ethereum net­work can’t stop The Merge.

While they can fork, or clone, and main­tain a ver­sion of the net­work — an alter­nate uni­verse of sorts where the proof-of-stake tran­si­tion nev­er occurs — Ethereum experts cau­tion this endeav­or will be lit­tle more than a dan­ger­ous cash-grab tar­get­ing unsus­pect­ing retail traders.

Still, ram­pant spec­u­la­tion over the post-Merge prospects for such an Ethereum fork has led some exchanges pre­emp­tive­ly to cre­ate mar­kets for “ETHW,” a cur­ren­cy that doesn’t yet exist.

Under proof-of-work (PoW), min­ers help secure the Ethereum main­net and are reward­ed with new ether issuance. But Ethereum’s social con­sen­sus is demo­c­ra­t­i­cal­ly expressed through the actions of oth­er stake­hold­ers, and the move to proof-of-stake will put min­ers out of business.

So, it’s no sur­prise that some have band­ed togeth­er to pro­pose an alter­na­tive which would main­tain both proof-of-work con­sen­sus and the full Ethereum state — its trans­ac­tion his­to­ry and all records of assets. But will any­one use it?

“The fact that peo­ple think an ETH PoW fork will be any­thing more than a retail trap means we haven’t learned any­thing from near­ly a decade of social con­sen­sus hard forks,” accord­ing to Pseudoth­e­os, a pseu­do­ny­mous Invest­ment Research Part­ner at ven­ture cap­i­tal firm Variant.

“Near­ly every smart con­tract on the PoW fork will be bro­ken in some capac­i­ty,” he said.

Ethereum co-founder Vita­lik Buterin has also denounced ETH PoW forks as ploys for min­ers and exchanges to make a quick buck.

Why another fork?

Ethereum has gone through numer­ous hard forks before. The most famous split fol­lowed a con­tentious deci­sion in the network’s ear­ly days to thwart The DAO hack­er, a move which spawned Ethereum Clas­sic (ETC). 

ETC is still val­ued at a mar­ket cap of about $5.3 bil­lion, accord­ing to data com­piled by Block­works, despite hav­ing few dapps and a small frac­tion of Ethereum’s devel­op­ment activity.

Ethereum Classic’s native token has actu­al­ly been surg­ing as The Merge approach­es, buoyed by the idea that many min­ers may ded­i­cate their com­put­ing pow­er to the net­work once it’s no longer need­ed on Ethereum itself, Block­works report­ed.

Yet, unlike all pre­vi­ous con­tentious forks, this time around there are bil­lions of dol­lars in DeFi activ­i­ty on Ethereum, includ­ing sta­ble­coins which will be worth­less on a forked chain.

Out with the oracles, in with the replay attacks

And it’s not just sta­ble­coins; much of DeFi (decen­tral­ized finance) relies on price ora­cles to func­tion and, like the sta­ble­coin issuers, major ora­cle net­work provider Chain­link has sim­i­lar­ly sig­naled a lack of sup­port for any proof-of-work fork Ethereum min­ers try to launch.

“Users should be aware that forked ver­sions of the Ethereum blockchain, includ­ing PoW forks, will not be sup­port­ed by the Chain­link pro­to­col,” accord­ing to Chain­link doc­u­men­ta­tion updat­ed on Saturday.

The idea that a fork with proof-of-work con­sen­sus could be use­ful if The Merge fails is also wrong, accord­ing to Hasu, the pseu­do­ny­mous Flash­bots strat­e­gy lead and research col­lab­o­ra­tor at Paradigm.

“If any­thing goes wrong with the merge, it just gets delayed until the prob­lems are fixed and then the merge hap­pens a few weeks lat­er,” he tweet­ed on Saturday.

There may even be sig­nif­i­cant risks inter­act­ing with the forked chain, Pete Kim, head of engi­neer­ing at Coin­base Wal­let, wrote.

That’s because, “so far there is no plan to change the chain ID for replay pro­tec­tion,” he tweet­ed Sat­ur­day, adding, “that means any­thing you do on one chain can be replayed by any­one on the oth­er result­ing in loss of funds.”

So, while a form may be inevitable, there’s lit­tle rea­son for users to pay any attention.

Exchanges bet on trader demand

None of this has stopped cryp­to exchanges Poloniex and Bit­Mex from mov­ing ahead with futures mar­kets on a poten­tial “Eth­PoW” net­work token.

The Justin Sun-backed Poloniex exchange has issued an “ETHW” token on the Sun-con­trolled Tron blockchain. As of Mon­day at 1:30 pm ET, the token is chang­ing hands for about $118, accord­ing to Coingecko, or about 6.6% the val­ue of one ether.

Bit­Mex announced on Mon­day that it would launch ​​a Teth­er-mar­gin­ed ETH­PoW futures con­tract begin­ning Tues­day, allow­ing traders to spec­u­late on the price of a future forked ETH using USDT.

Anoth­er cryp­to exchange, Huo­bi, has high­light­ed guide­lines that a fork would need to fol­low to be con­sid­ered for list­ing. Notably, the exchange requires that replay attacks be prevented.

Block­works reached out to Huo­bi and Poloniex for com­ment but has not heard back by press time.

Staked ether once again being sold

In anoth­er sign of trad­er-spec­u­la­tion, the val­ue of Lido staked ether (stETH), rel­a­tive to ETH has been falling in recent days, data from Dune Ana­lyt­ics shows. 

That could be due to the fact that a forked stETH token will be worth­less, while the proof-of-work forked ETH might still be exchange­able for some­thing of last­ing val­ue. Huo­bi and Poloniex users can deposit ether on either exchange to auto­mat­i­cal­ly receive the forked token post-Merge.

Each stETH is cur­rent­ly worth about 0.96 ETH, its low­est point in almost a month. If The Merge pro­ceeds smooth­ly, every stETH will even­tu­al­ly become with­draw­able for 1 ETH some­time in 2023, once a fur­ther planned fork enables the with­draw­al of staked ETH.

But there is no such thing as staked ether on a hypo­thet­i­cal proof-of-work fork, so its val­ue will be zero. 

Ethereum’s state includes all the tokens and pro­to­cols which inhab­it the ecosys­tem but, crit­i­cal­ly, it’s the social con­sen­sus around it pro­vides the net­work with val­ue — and that can’t be copied.

That’s one rea­son for Ethereum experts like Hasu to wield such scorn on the whole prospect of a fork.
“Although most alt chains today are forks of ethereum, none has forked ethereum state. Not because they didn’t think of it, but because it’s a com­plete­ly stu­pid idea,” he said.

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  • Macauley Peter­son
    Macauley was an edi­tor and con­tent cre­ator in the pro­fes­sion­al chess world for 14 years, pri­or to join­ing Block­works. At Bucerius Law School (Mas­ter in Law and Busi­ness, 2020) he researched sta­ble­coins, decen­tral­ized finance and cen­tral bank dig­i­tal cur­ren­cies. He also holds an MA in Film Stud­ies; film cred­its include Asso­ciate Pro­duc­er of the 2016 Net­flix fea­ture doc­u­men­tary, “Mag­nus” about World Chess Cham­pi­on Mag­nus Carlsen. He is based in Germany.

    Con­tact Macauley via email at [email pro­tect­ed] or on Twit­ter @yeluacaM

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