Dialogue: Arbitrage opportunities behind Ethereum hard fork

As the Ethereum PoS upgrade is approaching, the original PoW miners are not willing to be abandoned by the Ethereum Foundation and are actively preparing to retain the PoW chain and hard fork Ethereum. At 8 pm on September 8, BitCoke Exchange held an online AMA (ask me anything) event, inviting EthereumFair project owner satoshi_song, ETH1 hard fork project owner JACK LIAO, Planet Daily, and Fast Chain Headlines to explain the considerations of miners' insistence on hard forking, and discuss the challenges and problems that PoS Ethereum may face, as well as trading and arbitrage opportunities before and after this upgrade.

The guests participating in this online AMA are:

• JACK LIAO: Miner, Founder of Bitcoingold Lightningasic

Liao Xiang, an old miner, entered the blockchain industry in 2012. He has been involved in mining machine manufacturing, mining, and has invested in related hardware wallets, ATM machines, and exchanges. In 2017, he founded Bitcoingold. Currently, Liao Xiang is the coordinator of three different Ethereum PoW hard fork projects and is communicating with the Korean community.

• Satoshi_song:Ethereum Fair Dev

In 2019, he initiated the dogecoin Chinese community, in 2020, he initiated the defi seven o'clock community, and in 2022, he initiated the Ethereum fork. He is also an old coin investor who started a business in Garage Coffee in 2011 and has been engaged in technology-related work in this industry.

Three years ago, the Ethereum fork was prepared and the ClassZZ POW public chain was launched with the goal of cross-chain for dogecoin and carrying Ethereum computing power.

• Xichen: Founder of Kuailian Toutiao

As a media platform in the web3 industry for 18 years, Kuailian Toutiao has been supporting the industry with cutting-edge information, in-depth investment research and brand services. He is also the brand manager of MetaStone.Group, a risk hedge fund covering web3 primary investment and secondary asset management. The fund currently has a capital scale of nearly 1 billion US dollars, with primary investments in projects such as unity/metamask.

In 2018, KuaiChain Toutiao also participated in overseas mining. Currently, it mainly makes primary investments, focusing on areas such as infrastructure, NFT, Defi, etc.

• Loopy Lu: Researcher at Daily Planet

Loopy, the daily planet writer, has been hanging around in the secondary market and entered the circle during DeFi Summer. He worked as an investment researcher in a media/institution and also participated in two NFT projects as a consultant in charge of marketing.

Question from Q sister on behalf of BitCoke:

1. Many people are not particularly clear about the PoS upgrade schedule. Please let Leo and Loopy from Daily Planet explain.

LEO: Roadmap for PoS upgrade released by the official foundation.

At present, it seems that the migration from the PoW chain to the PoS chain will be officially completed on the 15th.

2. The Ethereum Foundation has already said that it does not support hard forks, so why do miners want to keep the PoW Ethereum chain? What are the considerations for you two to support hard forks?

LIAO:

First of all, the interests of the Ethereum Foundation and hard fork miners are conflicting.

There are two main reasons why I coordinated multiple teams to do the Ethereum fork.

First, Ethereum upgrades are risky. There are three risks. One is the risk of code security. The second is the changes brought about by changes in regulatory policies. It is possible that regulators will regulate Ethereum as a security, and then the entire Ethereum ecosystem will collapse under the new regulatory conditions.

The risk is, which one is the real public chain project between Pow and POS? I personally believe it is POW, not POS. Why do I say that? The inventor of the first POS was BM, who has tried two projects and both failed. Everyone promotes that POS saves power and has high TPS. These two things are not the core technical indicators of a blockchain, but a secondary technical indicator. Why do I say that? If power saving and high TPS are core indicators, then blockchain should not exist, Bitcoin should not exist, and Ethereum should not exist. Now our electronic payment methods, such as Alipay, can achieve 1 million TPS during Double 11, which is several times higher than the current Ethereum after upgrading POS, not to mention power saving. Everyone saves power in the same way, and all use servers.

So I support the fork of Ethereum for this reason, to hedge the risk of uncertainty in Ethereum upgrades, but I am not against Ethereum making this attempt or innovation. In other words, they follow their plan A, and we follow our plan B.

The second reason is that the mining industry is now a group of people with money and people. The mining industry has assets of 10 billion US dollars and there are hundreds of thousands of miners around the world. So the rich and the people are our customers. From the customer's perspective, we have to provide services to everyone. In this way, supporting such a fork project will inevitably have a certain commercial value. From the perspective of hedging risks and the perspective of customers, it is our duty to support everyone in the POW fork project. This is the core reason why I am coordinating the three different forks.

SONG:

First of all, in the early days of Ethereum, Vitalik also focused on finding miners in China to promote the development of the Ethereum chain. From the birth of Ethereum to the present, miners have expended so much effort on Ethereum, and so many batches of miners have undergone the survival of the fittest. It is understandable that the current miners retain POW, not only to retain interests, but more to retain the essence of this industry.

Since the development of Ethereum, POW has promoted the development of Ethereum's market value of hundreds of billions of dollars in terms of security and decentralization. POW has also been the escort for Ethereum to move forward. Although the times need to develop and move forward, this industry has its particularity, that is, the only constant is decentralization. Performance and other things are secondary. There are many ways to replace them, but the essence of decentralization cannot be abandoned or compromised at will. And the essence of this decentralization, in my opinion, is the characteristics of unconditional entry and unconditional exit.

In terms of security, it also tells everyone that you can attack me, but you can only bear the cost and time. The chain that grows up in this kind of attack is more reliable.

Currently, Ethereum has switched to POS, and has basically completely abandoned POW. So first, the mining machines with millions of dollars need to find a way out; second, this Ethereum fork is completely different from the ETC fork in 2016. After the development of defi, web3, nft, etc., it has a strong ecosystem that can run independently; third, the current number of Ethereum addresses has exceeded 200 million, and the number of contract applications has exceeded 80 million, all of which will become ownerless traffic.

For an ecosystem with strong ownerless traffic and many autonomous operations, supported by a large number of underlying miners, then this Ethereum fork is the best way and route. It can also preserve the spark for the industry under future POS supervision.

Supervision should be targeted at applications or other centralized products, and the underlying chain should not be regulated. For example, soil can grow crops but also poison, so soil should not be regulated.

3. What are the plans for ETHF and ETH1 in subsequent ecological construction?

LIAO:

Regarding ecosystem construction, I think there are two directions that can be considered. Not only ETH1, but also ETF can refer to this idea. The first is to inherit the ecosystem of ETH on the original forked chain. How to activate them? Of course, since each company has a different degree of close connection with the Ethereum Foundation, and their business models are different, some projects cannot naturally support the forked chain, but some projects can continue to operate on the forked chain, that is, these Dapps that need to be forked.

In addition, the projects that failed in the competition on ETH, or those in the second tier, will inevitably have the urge or necessity to harvest the early traffic on POW. Many third parties have contacted us to deploy their services and applications on the fork. In fact, these two parts can build a preliminary prosperous ecosystem.

At the same time, from a technical perspective, POW also has the opportunity to achieve this high performance. In 2019, I published an article that expanded the POW proof of work. I named it the appropriate proof of work mechanism, or pow2.0. My article is posted on my blog. Interested friends can go and have a look. In applying for this patent in the United States, I think this patent will be put into the blockchain's defensive patent room in the future, allowing everyone to use it freely, but if a third party claims rights, we will use it to counter or exchange with the third party's patent claims.

SONG:

Currently, Ethereum Fair has released the latest test chain version after the merger of Ethereum Bellatrix, including Ethereum Sentry Omega (v1.10.23). On bitkeep, 1inch's dex aggregation transaction is currently being publicly tested, and third-party R&D teams are already providing front-end products for makerdao, curve, benddao and opensea.

In terms of ecological planning, the most important thing at present is to run the current important ecological projects on Ethereum. After all, there are tens of millions of ETH in the ecosystem. These ETH are equivalent to ecological minerals, and it takes everyone's concerted efforts to dig them out or exchange them. For example, MakerDao can generate Dai, which can be used to exchange USDT in Curve, and then 1inch can aggregate transactions to fork Candy ETF, etc.

In the early days, oracles like Chainlink were missing, so the prices of many oracles remained unchanged, and there were many arbitrage opportunities in the ecosystem, which also gave everyone a fair chance to participate in ecological mining.

The most important ecological mineral is USDT. I believe many people think that USDT will return to zero in this fork. On the contrary, I think that the USDT of the POW chain may be worth more than the USDT of the POS chain. Of course, this is just my deduction and speculation and does not constitute investment advice.

Another major ecological plan is NFT. I think that where the NFT community is, there is the project, not where the NFT project is. NFT will be better developed in the forked chain. It is not only the continuation of Benddao, but also the continuation of Opensea. Although for example, Bored Ape has a copy in the forked chain, it is also in the owner address and also requires the owner address. Unified transactions will generate transactions, so the NFT of the POW chain has more playability.

In the future planning of ETF, we will design NFT protocols related to mortgage, lending, etc., as well as leasing, copyright, multiple creation incentive protocols, etc. The last important ecological planning belongs to layer2. Layer2 has the property of unlimited expansion. We are also in contact with more layer2 project parties. The POW chain will be the best destination for layer2.

4. Please give your comments on Ethereum with PoS mechanism. What problems and challenges may it face in the future?

LIAO:

I think the biggest challenges for the POW mechanism in the future are two: one is how to deal with changes in regulatory policies. For example, if the US SEC or the US Treasury defines Ethereum as a security, then its entire valuation model will completely change from today's blockchain asset blockchain track to the traditional Internet financial track. The entire ecosystem above will need to comply with new regulatory laws and regulations. The entire ecosystem will face the risk of collapse, which is the first one.

Second, why do we support POW? Because POW is an open, competitive, and dynamic system, while POS is a static, closed, and powerful system. You can compare it. POS is actually very similar to the landlord class in feudal society. For a closed system, it is impossible to introduce external competitive and dynamic resources, and it cannot achieve a state of survival of the fittest. It is possible that POS Ethereum will become a stagnant pool. In the words of thermodynamics, it will become a state of increasing entropy. In other words, Ethereum is very likely to repeat BM. Following the footsteps of the two projects of the founders of POS companies, BitShares and Steemit, is to return to zero.

Originally, there were only one or two successful POW EVM chains, and Ethereum only had one competitor, which was ETC. Now that Ethereum has changed to POS, its competitors have been infinitely enlarged, including EOS in the distance and all EVM compatible chains nearby, including BSC, Solana, Matic, Heco, etc. Its entire competitive environment has completely changed. In the POS state, I think Binance should be the most capable of success, because Binance has the traffic resources under the chain in one hand and its own son, BSC, in the other hand. It will inevitably intercept its traffic through corporate behavior. You see, Binance did something recently, which was to stop USDC and convert it all to its BUSD. Then the POS version of ETH will be forced to be converted to BSC and BNB. I don’t think it’s difficult. Once Binance is strong enough to monopolize traffic, it will do so.

SONG:

Judging from the development of Ethereum before POW, the Ethereum Foundation already has the final say. If it switches to POS and drives away miners, Ethereum will eventually become web2, a real company product.

After Ethereum switches to POS, it may face over-enthusiastic regulation, which will expose the centralized nature of ETH POS, which will bring about a huge disaster.

In the Ethereum staking system, bribery will affect decision-making. In POS Ethereum, if more than 2/3 of the ETH is staked, the attacker can initiate the deletion of the verified block from the chain. Currently, the random number algorithm of Ethereum POS is still a black box. If this is not open source, then Ethereum POS will be a completely centralized chain. If it is open, it may face the situation before EOS. In the future, large staking groups such as Liod and Coinbase will appear. Such groups are effective in the short term, but will be a disaster in the long run.

The existence of an industry cannot rely solely on BTC POW. In a powerful application chain, there must be a POW.

Then this time Ethereum Fair will take on this role.

5. Why did BitCoke exchange fork USDT?

LEO:

Users should have noticed a series of actions BitCoke has taken recently on Ethereum hard forks, including the launch of contracts for three forked coins. In order to support hard forks, we have specially launched the USDST fork. Users deposit USDT and can click "Fork Exchange" to get a 1:1 USDTS + USDTW

Stablecoins are the most important assets in the public chain ecosystem. Even though the issuers of centralized stablecoins such as USDT and USDC have indicated that they will migrate to the PoS chain led by the Ethereum Foundation, the general consensus is that stablecoins will still be needed on the PoW Ethereum chain. Therefore, in order to respect the opinions of users who hold different attitudes towards PoS upgrades, BitCoke has launched the USDT (pre) hard fork, supporting users to freely exchange USDT for USDTS and USDTW "candies".

As the PoS upgrade is coming soon, we have also held a special reward event for users who perform fork exchanges. Not only can you get 1 USDTS and 1 USDTW for your deposited USDT, but you can also get the special NFT commemorative reward for this USDT hard fork event.

SONG:

POW USDT is a more powerful meme token than lunc dogecoin.

LIAO:

There is a question about why BitCoke wants to list USDT fork tokens. Here is my opinion on this matter. First, we divide all the DAP tokens issued by the Ethereum ecosystem into five categories.

First of all, the first type is like stablecoin, which is backed by assets. The second type is with certain financial attributes, such as Inchirker, which has lending and insurance. The third type is to provide services. The fourth type is like oracle, such as UNISWAP. The last type is particularly interesting, which is NFT, which is a non-homogeneous asset. It does not make any delivery to any third party. After being divided into these categories, you can actually think about what kind of valuation we give it, or how to set its price, and you can come to some very interesting observations in the future.

The 100%-backed tokens can only support one chain, because they only have one asset and cannot back up two or three tokens, so they can only choose one chain to support. Is the forked one, such as USDT, completely worthless? I think it still has some value, but it may be relatively low, so I will choose an underlying asset as a reference. LUNAC has no value at all, but it has become a project with a market value of billions of dollars today.

The forked USDT will still have value, this is the first. The second is that the forked USDT may become a truly ownerless stablecoin, because there are two models of stablecoins now, one is asset-backed, and the second is what we call algorithmic stablecoins, but algorithmic stablecoins seem to have failed so far, so will this ownerless stablecoin succeed? I think there is this possibility. Let's think about it, for example, all of our stablecoin projects today, whether it is USDT or USDC, if it is required by the US government to be regulated one day, like a bank, then the value deposited on it will automatically be mapped to these ownerless stablecoins. Then there is this possibility, today's USDTW will have a hundredfold growth.

I would like to give an example, at the other extreme, if the forked NFT is valued, it has no collateral and does not make delivery to a third party. How do you think it should be valued? I personally prefer to use the valuation model of traditional stocks, that is, ex-rights. Just like stocks, today I split your stock, one share for ten shares, then theoretically its price becomes 1/10. As for NFT, I think its value should be split according to this amount. It was originally worth one ETH, and it was split into two, that is 0.5 per person, and then three is 0.3 per person. I accept such a valuation model, because for all users, its scarcity, its endorsement, etc., are exactly the same.

So you can look at the middle part, based on its business model, risk level, and customer ownership, you can give it a certain valuation. So BitCoke is the first exchange in the world to launch this forked token. I think the entire BitCoke team has a very deep understanding of blockchain and has very strong execution capabilities. They can become the world's first exchange to support the launch of Ethereum's hard fork token TOKEN.

There was a saying before that the token and the ecosystem under Ethereum will be a river of life for Ethereum, and it is impossible to fork. I think time will prove that the token on Ethereum is not a river of life for Ethereum, but a stimulus for forking. At the same time, different types of tokens will have different story models and different project parties on the forked chain. It will make some corresponding deployments on the forked chain, and everyone can wait and see. In this round of Ethereum fork, those who make the right choice, whether it is the fork team, the trading team, or the exchange, I think in the next four years, it will become a real, or a big step forward, and will move from the original second-tier echelon to the first-tier echelon.

6. What does the media think about Ethereum’s PoW hard fork? Is it an extremely risky move?

Xichen:

I think it is still quite risky. The first aspect is whether mining will be hit by policies in the future, as energy consumption issues are constantly criticized. Ethereum currently consumes 93.97 terawatt-hours of electricity per year, which is equivalent to the total electricity consumption of Kazakhstan in a year, and the carbon footprint generated is equivalent to the total amount of Sweden in a year. Creating an ordinary NFT on the Ethereum network under the PoW mechanism will bring 200 kilograms of carbon, and the sales, auctions, transfers and secondary sales after casting will all generate a large amount of carbon footprint. It is impossible to judge the pros and cons from a moral perspective. After all, almost every activity in life involves carbon emissions, and the increase in total carbon emissions means that people's lives are getting better due to consumption. Of course, more and more miners are turning to renewable energy, which is a positive thing.

The second aspect is whether economic incentives can recruit miners to support the network. After all, the value of ETH is not just about consensus formation. Without sufficient ecological construction and richness, without broad community support, and without capital injection into the project, will the economic feasibility of participating in ETHW mining increase, and can the value of the token be guaranteed? Although different from previous forks, referring to ETC, the challenges faced by hard forks are also difficult.

Combined with the second point, miners who adhere to the spirit of decentralization contribute their hardware, electricity, and time to defend citizens' rights in the digital world. If there are no sustainable economic incentives, some undetermined speculative miners may withdraw. The unsustainable price is one aspect, and whether the computing power of the forked chain will be decentralized is more critical (the specific data of the mining pool that supports the fork is unknown and cannot be judged).

LOOPY:

This is a milestone event in the history of Ethereum. This upgrade has changed the Ethereum consensus model from PoW to PoS. This is not only a technical upgrade, but also involves huge interests and community concepts.

The Ethereum merger forced the $19 billion POW mining industry to seek alternatives. Although miners can contribute part of their GPU computing power to Web3 protocols such as Render Network, Livepeer, and Akash, it is difficult for these protocols to handle all the computing power.

According to the data, the total market value of GPU-mineable tokens other than ETH is only US$4.1 billion, accounting for about 2% of ETH's market value, and ETH mining income accounts for 97% of GPU miners' daily income.

The security of forked coins is also worth considering, because this hard fork is not as simple as the ETH/ETC split, when mining and running the same client software were all that was needed, and each of the testnet fork codes needed to remove the POS conversion logic, disable the difficulty bomb, and update the chain ID to provide protection.

Mining software may also need to be forked/updated. Ethereum is about to upgrade and time is very tight. If there is a vulnerability in the underlying code of the ETHW fork coin, it will be easy to be attacked by hackers because there is no time to audit it, causing a sharp drop in asset prices.

SONG:

Ethereum Fair has completed the audit and released a binary client

Currently, P network and many exchanges refer to ETH POW as ethw

P Network also had a Twitter conversation with ETF at the beginning and clarified the matter.

So you can also think of ETF as ethw.

7. What impact will Ethereum’s PoS upgrade have on ordinary users? How can we participate in the hard fork and make a profit?

LOOPY:

Now the DeFi TVL on the ETH chain is around $40 billion, and the destination of these assets has become a big problem. Of course, this price figure is definitely wrong on the new chain.

At present, the tokens in DeFi on the new chain are likely to be locked in forever. In addition to various protocols, there are also multi-chain assets locked by various bridges. It can be said that the current ETH chain is already part of the entire multi-chain world, and it is difficult to deal with it separately. This is also the biggest difference from the etc fork.

When the fork just started, the centralized stablecoins, project governance tokens and other ERC tokens of the PoW chain have essentially returned to zero due to the lack of value support. For example, this time USDTW will become a large meme. Thanks to smart contracts and AMM mechanisms, although it has no value, it still has a price, which has a lot of arbitrage space. In a short period of time, many PoW zero-returned coins can be sold through DEX in exchange for more PoW ETH. However, this requires direct interaction with the contract, which has a certain threshold for ordinary users.

Thanks to AMM, after this fork, the various currencies in the huge Ethereum ecosystem can be said to have added a huge amount of various ERC coins to the entire PoW ETH market. They have no value but have prices and can be traded at the same time.

LEO:

USDTW can be transferred to the ETH-PoW chain, participate in the DeFi ecosystem, or trade, and will become a new generation of meme coin in the future.

Xichen:

The design goal of the PoS merger is to minimize the impact on dapp developers and proceed in accordance with the principle of minimal disruption. The application client will switch to PoS seamlessly, and ordinary users do not need to make any preparations and will not be affected.

From the perspective of the currency standard, there is no impact on ordinary users. The ETH they hold will continue to remain the same ETH after the merger, and there is no need to exchange any ETH for the merger. From the perspective of the U standard, the volatility of the currency price will definitely increase.

I'll be more direct and talk about the benefits. The friends on Planet have made a lot of analysis and I will make some additions based on it.

Users with high risk appetite have many options: holding some ETH (borrowing ETH in the lending agreement to amplify risk exposure) can obtain hard fork tokens/you can also choose liquidity staking services to stake ETH/or observe the exchange rate of stETH.

8. What changes will occur when ETH switches to PoS? What impact will it have on the Metaverse and NFT built on Ethereum?

Xichen:

The changes can be summarized as scalability, security and sustainability proposed by the government;

They are:

- Prepare for the next sharding, and process more transactions per second without increasing the size of the network nodes.

- The transition to Proof of Stake means that the Ethereum protocol has greater disincentives to attack.

- Ethereum's energy consumption will be reduced by about 99.95%, which will save more energy and use less carbon to ensure greater security; the hardware requirements will be reduced;

To be honest, the impact on the Metaverse and NFTs built on Ethereum will have to evolve.

Ethereum is limited by its low scalability, crowded ecosystem, and limited users. Based on our assumptions, we calculated that the current adoption rate of crypto users is only 0.3% (which is about the adoption rate of the Internet in 1995 ≈ 0.4%), which shows that we are in the very early stages. The PoS mechanism is one of Ethereum's plans to achieve scalability. If it can support thousands of transactions per second and reduce the cost of use after merging and sharding, so that most parts of the world can use it conveniently, then we can look forward to the next pioneering Internet. From the perspective of DeFi alone, there are still 1.7 billion people in the world who do not have bank accounts. If the system load and transaction volume of Ethereum are guaranteed, and the compliance issues of blockchain are resolved, these people are potential users of open finance.

It is very likely that new business models will emerge in the fields of NFT, Social, Game and even consumption.

The complexity of applications and protocols at this stage urgently requires more efficient and scalable underlying infrastructure. With the leap in underlying infrastructure technology and the openness provided by blockchain for development, it can be foreseen that the application innovation diffusion curve will be steeper and more permeable than any other industry. The interoperability and nesting of various applications and protocols will achieve network effects.

My opinion is that the Internet based on blockchain technology is subverting the Internet development process, which is based on a 10-year cycle, at a rate of technological innovation every 5 years.

LOOPY:

Maybe nothing has happened. Which chain the NFT is on mainly depends on the decision of the project owner or the consensus of both parties.

As the organizer, BitCoke actively supports and cooperates with the hard fork project. Currently, it has launched the contracts of three hard fork coins, ETH1, ETHF, and ETHW, and simultaneously launched the USDT hard fork. Users can choose to exchange the deposited USDT into USDTS and USDTW (candy coins).