Is Ethereum Proof of Work Going To Be A Gift For Crypto World?
Finally starting its long-awaited move to proof-of-stake, Ethereum will do so. There is debate and uncertainty surrounding what will happen to the deprecated proof-of-work network after the Merge because this significant update is expected to occur sometime next month.
Even though the “Ice Age” difficulty “‘s bomb” is meant to drive PoW miners away, there is a rising movement to maintain Ethereum’s original consensus algorithm.
The Ethereum community was in trouble in 2016. The developing ecosystem was rocked by controversy after an exploiter fled with almost 5% of the ether (ETH) in circulation. The end consequence was a “hard fork”—a change to the network’s code that was backward-incompatible and generated a new instance where token balances were modified as if the infamous “The DAO exploit” had never occurred. How should Ethereum move forward?
However, not everyone agreed. Under the name “Ethereum Classic,” a small group of anti-fork purists and some of Ethereum’s most vocal trolls and critics continued to run the outdated, hack-tainted chain. The spin-off chain’s community was destroyed, yet it competed with its sister network to be the rightful heir to the Ethereum throne despite this. Additionally, it might have come close to achieving its objective because ETC, the Classic network’s ether (ETH) counterpart, briefly appeared capable of upsetting ETH’s price.
Although Ethereum Classic’s attempt to dominate the blockchain ultimately failed, it nevertheless prepared the ground for years of deception, misunderstanding, and controversy.
Today, the past is repeated.
It has been on Ethereum’s agenda since the chain’s launch. They claim this time that Ethereum will finally begin moving toward a proof-of-stake (PoS) system on September 15 (or close to that day). The long-delayed upgrade will drastically reduce the chain’s carbon footprint in favor of a new mechanism that supporters believe will make the network more secure. However, not everyone is anticipating PoS. Several Ethereum miners, or users of computers used to process and verify transactions on the current proof-of-work (PoW) network, intend to continue using the old network.
This cloned network will be a crypto “uncanny valley” without Ethereum’s users and core developers. There will be apps and tokens flying around with no purpose or value, but it will merely be a real Ethereum. Things will malfunction. A thief will be a thief. But it seems inevitable that support will grow for a forked PoW Ethereum.
How come proof of work?
There is a lot of discussion surrounding the advantages of PoS versus Ethereum’s existing PoW consensus algorithm. We won’t delve into the specifics of that argument here. Still, it’s essential to know that a consensus mechanism is a set of guidelines that nodes—the computers that run Ethereum’s blockchain—follow while processing transactions.
Computers can compete to publish blocks of transactions on the Ethereum blockchain as long as they match specific criteria. They get paid for doing so, often in transaction fees and distribution of newly released cryptocurrency.
The method by which PoW and PoS choose who can issue blocks is different. Using “miners,” the Proof of work system—initiated by Bitcoin and currently utilized by Ethereum—accomplishes this objective. Miners fight for the right to add the following block to the chain by working to solve a form of cryptographic challenge, which is essentially a race to obtain a random integer.
Instead of mining, PoS assigns the task of issuing blocks to “validators.” One can become a validator by placing 32 ether as a “stake” on the Ethereum blockchain. One is more likely to be randomly chosen to issue the next block if they stake more ether.
PoS proponents claim that PoW is energy wasteful and favors businesses that can afford to run pricey, mining-optimized computers known as ASICs. PoW supporters claim that PoS has less proof than PoW and carries security and centralization problems.
Whatever each system’s inherent benefits and drawbacks, Ethereum will migrate to PoS in September if everything goes according to plan. But what will happen to all the PoW miners who bought that expensive mining equipment? What about people who believe Proof of work is more secure than PoS despite its flaws? Not everyone with a personal (or ideological) stake in Ethereum PoW intends to abandon the current system. Why should they, too? Some people would see a fork with cryptocurrency, while others might see dollar signs.
Justin Sun and Chandler Guo, two well-known crypto figures, have declared their support for Ethereum PoW forks, and crypto exchanges like FTX and the Sun-backed Poloniex claim users would be able to trade forked ether tokens.
Chandler Guo tells why he is the man who would hard fork Ethereum https://t.co/wvtmb6n5Jz
— Chandler Guo (@ChandlerGuo) August 18, 2022
Ethereum, a network of computers, functions more like a nation-state with a set of regulations than it does as a single piece of software. The entire network doesn’t “update” if many users agree to change the rules. They’ll have to persuade others to join them.
These rule modifications can occasionally result in a fork, where two (or more) brand-new networks emerge with minor operational distinctions and are each backed by a portion of the community. The PoW forks Sun and Guo describe will generally be perfect replicas of the principal Ethereum chain, with the “state” of the original chain, or the transaction history and token balances, preserved.
Users will unexpectedly have access to two (or more) distinct blockchains with identical token balances and smart contracts (the tiny computer programs that operate on Ethereum’s blockchain) at the Merge to PoS. But would all your money suddenly double (or treble, or quadruple, depending on the number of forks) if Ethereum is forked? Not really, no.
Only what the market determines is the value of a token. On PoW forks, some tickets, in particular the ether used to cover transaction fees, might be worth something. Plus, irrational speculation is nothing new in the meme-driven markets for cryptocurrencies.
However, not all the applications and services created on top of Ethereum’s soon-to-be PoS network will support PoW forks. In most situations, the lack of active community participation will disrupt the mechanism by which tokens derive their apparent value.
Consider stablecoins like USDT and USDC, neither of which seems to have a chance of being supported on PoW Ethereum forks.
Because they are “pegged” to the amount of $1, as opposed to the fluctuating ethers and bitcoins of the globe, these tokens are essential to Ethereum’s decentralized financial ecosystem. Because their issuing authority asserts that they have $1 in the bank for each digital dollar they circulate, they trade at this price.
You can’t just copy your USDC and USDT balance onto a different blockchain. Only the instance of a digital dollar present on the canonical, soon-to-be-PoS blockchain will be the subject of the 1:1 backing. Owning USDC or USDT on an Ethereum PoW fork will be equivalent to holding fake money.
The capacity of other forked coins to maintain value will be significantly impacted by the lack of stablecoin support for Ethereum PoW forks. Throughout DeFi, collateral is in USDC and USDT. When these tokens on the PoW chain stop trading at $1, a cascading effect will be triggered, which, combined with other circumstances, will make the majority of other forked tokens worthless. At least initially, Ethereum’s PoW forks will be like China’s enormous ghost cities: there will be foundations but no life.
So why would someone provide a lifeless imitation blockchain?
One of the most vocal Twitter users, Kevin Zhou of Galois Capital, has predicted that after Ethereum switches from PoS to PoW, a flood of PoW forks will occur. Zhou said in a podcast conversation with author and crypto-journalist Laura Shin that there are genuinely two sorts of incentives.
Even though I still think the fork is mildly accretive, long merge plays have overextended in my opinion. Hence, with a heavy heart, I’ve decided to express a net short on ETH by shorting in small size ETH Sep futs and long BTC in that size multiplied by ETH beta to BTC.
— Galois Capital (@Galois_Capital) August 13, 2022
The first is sheer grift, said Zhou.
“Someone could construct a fork; they are aware that it is unlikely to function and have no intention of supporting it. They’re just going to receive some free coins, Zhou said, and then dump them.
Hasu, a prominent figure in the cryptocurrency community and a researcher at Ethereum infrastructure company Flashbots, has referred to Ethereum PoW forks that recreate the original chain’s ledger as a “totally idiotic idea.”
He wrote on Twitter that cryptocurrency is “full of awful projects that solely exist to dump on retail,” but it doesn’t make it acceptable to promote them. The continued existence of ghost chains like ETC (Ethereum Classic) does not support that assertion.
Also, read – Why is Proof Of Work Objective?
But contrary to Hasu and most of the larger crypto community, Zhou does not believe that all PoW forks will be covert money grabs.
Over $600 million in rewards and transaction fees were collected by Ethereum miners in the previous month. An Ethereum PoW fork, in Zhou’s opinion, would be the best option for miners looking to put their expensive machinery to use on a new chain.
“Someone put a lot of infrastructure in place. There is still a lot of infrastructure there even though it is not being operated. Is that an improvement over other layer 1 blockchains? Is that an improvement over Ethereum Classic? You could certainly argue that it is, in my opinion,” Zhou remarked.
Vitalik Buterin, the co-founder of Ethereum, dismissed worries that PoW Ethereum forks, whether fraudulent or genuine, may reduce activity on Ethereum’s PoS mainnet when he spoke at the ETH Seoul conference earlier this month.
In contrast to Ethereum, which will retain PoW, Buterin referred to “very much everyone” in the Ethereum community as “united” in favor of the move to PoS. He called Ethereum Classic “the superior product for those with those pro-proof-of-work principles and preferences.”
Buterin’s reversal on the initial Ethereum fork demonstrates how less of a threat it has grown in the years after its contentious launch. Miners have recently invested in Ethereum Classic in the hopes that it will draw supporters of PoW if Ethereum abandons PoS. Still, activity on the troublesome chain is minimal compared to the rest of Ethereum. Whatever your opinion of PoW, whatever happens next will be puzzling. It might even be fun. Still, if Ethereum Classic’s experience is any indication, it is unlikely to impact Ethereum as a whole significantly.