What will happen to the ecosystem on Ethereum if it is forked?

Mainstream Ethereum applications all support PoS chains, which means that the forked PoW chain has to build its ecosystem from scratch.

The Ethereum merger is imminent, and the Ethereum fork led by cryptocurrency KOL Guo Hongcai (nickname Bao Erye) has attracted a wave of attention. He hopes to protect the interests of PoW miners and does not support Ethereum under the PoS mechanism after the merger, but instead forks out an EthereumPow (ETHW) chain.

ETHW attempts to introduce liquidity pool freezing technology to freeze the main liquidity pool contracts on the PoW chain immediately after the fork to prevent scientists from using unrecognized assets such as USDT to exchange for ETHW tokens and keep the on-chain ecology from being too chaotic as much as possible.

The determination of ETHW fork seems very firm. If the fork really happens, the future of the Ethereum chain ecosystem will become the focus.

As of August 21, many mainstream Ethereum projects, including the two major stablecoin issuers Tether (USDT) and Circle (USDC), the mainstream oracle ChainLink, the on-chain lending protocol Aave, and the BAYC issuer Yuga Labs, have expressed their support for the merged PoS chain. Except for PoW miners and TRON founder Justin Sun, there are few voices supporting the PoW chain.

Many industry insiders believe that after losing the support of mainstream ecological projects, the forked PoW will face the collapse of the chain ecology. The fork dispute may be decided in a short time.

Alex, the leader of the ETHW community, revealed that it has assembled 300 to 500 programmers to provide technical support, and it is expected that the first batch of DEX, lending, and stablecoin projects will be born on the Pow chain at the end of September. This shows that ETHW seems to be ready to rebuild the ecosystem from scratch. But the question is, how can ETHW, which has expensive gas fees, poor performance, and lacks an ecosystem, compete with the PoS version of Ethereum and many emerging public chains?

Ethereum fork incident continues to ferment

On August 19, the latest Ethereum core developer meeting once again determined the mainnet terminal total difficulty (TTD) that triggers the Ethereum merge. As previously planned, the Ethereum merge is expected to be officially launched around September 15.

As one of the important steps in the Ethereum 2.0 upgrade process, the merger of the Ethereum mainnet and the beacon chain equity proof system marks the elimination of the Ethereum proof-of-work mechanism (PoW). After the merger is completed, Ethereum will transition to the equity proof mechanism (PoS). The miners who originally served as the Ethereum network verification nodes will exit the stage of history. Ethereum under the PoS mechanism will adopt the staking verification method. After the merger, Ethereum's energy consumption will be reduced by about 99.95%.

The much-anticipated merger event has added more uncertainty due to the emergence of the "fork faction". Guo Hongcai, a KOL who was once active in the Chinese cryptocurrency circle, believes that Ethereum's change in consensus mechanism is an abandonment of the original miners and will also lead to the centralization of Ethereum. Therefore, he hopes to unite Ethereum developers, communities and miners to initiate a hard fork when Ethereum merges, that is, not supporting the PoS chain, but making partial modifications based on the current mainnet version to fork out an EthereumPow (ETHW) chain.

The drama of this fork has been brewing in the industry for several days. ETHW released its initial version on August 15, with the main features including disabling the difficulty bomb, abolishing EIP1559, and adjusting the starting mining difficulty of ETHW. "Banning EIP1559" aims to "return" the benefits of gas fees to PoW miners - after the Ethereum London upgrade in August last year, EIP1559 took effect, and most of the Ethereum network's gas fees were automatically destroyed and no longer distributed to miners.

As the fork preparations progress, ETHW led by Guo Hongcai has become more and more popular. Justin Sun, the founder of TRON, has made it clear that he supports the Ethereum fork. “We currently hold more than one million ETH. If the Ethereum fork is successful, we will donate part of the ETHW to the community and developers to support the construction of the Ethereum ecosystem.”

Currently, trading platforms such as Poloniex, MXC, and Gate have already launched two potential fork futures tokens ETHS (representing a complete conversion to the POS consensus algorithm chain token) and ETHW (representing the continued use of the POW consensus algorithm chain token) and related trading markets in advance.

Although ETC Cooperative, a non-profit entity supporting the Ethereum Classic ecosystem, wrote an open letter to Guo Hongcai based on its experience as a "veteran", explaining the many difficulties of implementing a fork today, ETHW's determination to implement a fork seems particularly firm. The latter responded to ETC Cooperative, saying that ETC has never grown since its birth. In the past four or five years, it has been standing still, stagnant, and unable to establish any ecosystem. "It is conceivable that ETC will continue to be a giant baby in the future."

ETHW responds to ETC Cooperative and expresses determination to fork

At the same time, ETHW used an ambitious statement to clarify its attitude towards the fork, "We are willing to call on the community to make this attempt."

Mainstream Ethereum applications support ETH-PoS

In the history of Ethereum development, there was a chain fork. In 2016, Ethereum's largest fundraising project, The DAO, was stolen. In order to remedy the funds, the Ethereum core development team proposed EIP-779, which allows everyone to withdraw their own ETH from the DAO contract through block rollback. However, some fundamentalist community members believe that this violates the spirit of the blockchain's immutability, so Ethereum forked into two chains. The original chain is the current Ethereum Classic (ETC), and the new fork is the current ETH. The consensus mechanism of both is PoW.

In the following years, the ETH ecosystem developed rapidly, and the emergence of applications such as DeFi, NFT, and DAO greatly enriched the on-chain ecosystem. According to OKEx data, at its peak, the total locked value on the ETH chain exceeded US$160 billion.

Compared to 2016, ETH is no longer the same today, and implementing a fork is not just a simple matter of which chain to support. You know, the reason why ETH's market value continues to grow is mainly due to the growth of the on-chain ecosystem. Once ETH forks again, which chain the on-chain ecosystem ultimately chooses will determine which chain will become the real Ethereum in the future.

It is foreseeable that once the fork occurs, users who hold Ethereum ecosystem assets (including ETH and various DeFi project assets, NFTs, liquidity, pledge certificates, etc.) will simultaneously obtain two equal assets, one on the ETH-PoS chain and the other on the ETH-PoW chain.

However, although the number of assets doubled, the value did not double. For example, if a user holds 10,000 USDT on the current ETH chain, after the fork, the user holds 10,000 USDT on each of the two chains, but the USD reserves corresponding to these assets are still only $10,000, so the user still essentially owns $10,000 worth of USDT, and which USDT on which chain can be exchanged for USD at a 1:1 ratio depends on which chain Tether, the USDT issuer, supports.

In the same way, whether users hold stablecoins such as USDT and USDC, DeFi protocol assets such as UNI and COMP, or NFTs such as CryptoPunks and BAYC, the final value ownership depends on which chain the stablecoin issuer, DeFi protocol, and NFT issuer choose. If a protocol supports two chains at the same time, then if the market value of the protocol remains unchanged, the assets on the two chains may fall at the same time, and eventually the added value will be equal to one asset.

So far, many Ethereum chain application parties, stablecoin issuers, mining pools, exchanges, etc. have made their positions clear on the Ethereum fork.

As the two most mainstream stablecoin issuers in the market, Tether (USDT) and Circle (USDC) have both stated that they will "only support Ethereum PoS chains." Tether said it will support POS Ethereum according to the official schedule. A smooth transition is critical to the long-term health of the DeFi ecosystem, including platforms that use USDT.

USDT issuer Tether indicates that it only supports the PoS version of Ethereum

As the largest on-chain stablecoin trading protocol in the market, Curve Finance also issued a statement saying that it will choose the chain selected by the stablecoin. It said that Curve DAO cannot force the selection of one of the forks, but only the chain selected by the stablecoin is feasible for Curve DAO.

The one-stop DeFi wallet DeBank believes that a hard fork will bring a huge disaster to the entire Web3 ecosystem. Therefore, during the transition period of Ethereum's PoS merger, DeBank and all its products will not support any forked chains.

Yuga Labs, the issuer of BAYC, also stated that in order to be consistent with the wider Ethereum community, in the event of a PoW fork, Yuga will only recognize NFTs on the PoS chain.

It is worth noting that many DeFi protocols on the Ethereum chain are coupled with each other and support each other, making it difficult for them to operate independently. Therefore, a "one move affects the whole body" effect will be formed.

One example is the scale effect of oracles. Currently, almost all on-chain lending protocols involve liquidation mechanisms, and accurate liquidation must rely on accurate quotations from oracles. Therefore, whether lending protocols such as MakerDAO, Aave, and Compound can continue to operate depends on whether the oracles they use support PoW chains.

Previously, Chainlink, the most mainstream oracle in the market, officially announced that it would not support any PoW forked version of Ethereum. Subsequently, Aave also issued a statement saying that due to the lack of oracles and related liquidity issues, Aave could not operate normally on any PoW chain. It has initiated a community proposal and promised to choose the PoS version of Ethereum as the main chain.

On August 19, Bitfly, the parent company of Ethermine, the current largest Ethereum mining pool, announced that after careful evaluation, Bitfly decided not to provide a dedicated mining pool for any planned PoW fork coins. Once the PoW mining phase is over, the Ethermine Ethereum mining pool will switch to a withdrawal-only mode. Subsequently, the Ethermine layer server will be shut down, and users will no longer be able to connect mining machines to the Ethermine Ethereum pool.

Compared to the majority of mainstream stablecoin issuers and DeFi protocols supporting PoS Ethereum, there are fewer voices in the market supporting ETHW. Apart from Justin Sun’s TRON project and PoW miners, few applications have indicated that they will choose ETHW.

Most trading platforms are "neutral". For example, Binance and OKX have revealed that whether to list new forked tokens in the future will be evaluated in accordance with the listing standards.

The fork dispute may be decided quickly

The fork dispute is essentially a consensus dispute. Judging from the current Ethereum ecosystem application statements, the support rate for the PoS version of Ethereum has an absolute upper hand, especially supporters such as USDT, USDC, and Chainlink, which play an extremely important role in the Ethereum ecosystem. Their "side" is likely to determine the final outcome of the battle.

After the Ethereum fork, there will be two identical versions of the assets corresponding to various protocols and asset issuers. The manager of the "vault" must then actively choose which version to recognize as true, and the asset value of the unsupported version will be directly reduced to zero from the first moment of the fork.

Take USDT and USDC as examples. As important assets supporting the operation of the DeFi ecosystem, these two mainstream stablecoins play an important role in applications such as DEX and lending protocols. Since their issuers have indicated their support for PoS Ethereum, the USDT and USDC on the PoW chain will return to zero after the fork, and the entire on-chain ecosystem will fall into great chaos.

For example, in the USDT-related liquidity pool of Uniswap on the PoW chain, since the value of USDT has returned to zero, everyone will quickly sell USDT, which may cause other assets such as ETHW to rise in a short period of time. At this time, the Chainlink oracle no longer supports the chain, and the lending agreement cannot get accurate price feeds, which can easily lead to large-scale liquidation accidents.

This is just one example of the chaos in the forked chain ecosystem. If most mainstream DeFi protocols support PoS chains, the application ecosystem on the PoW chain may collapse immediately and become a "ruin." Robert Leshner, the founder of Compound, warned that if Ethereum forks, the state of the entire Ethereum will not be transferred to the forked chain, and all stablecoins and DeFi applications on the forked chain will likely become invalid immediately. "You will not get double wealth."

Therefore, many industry insiders have analyzed that once the fork is completed, the winner will be decided immediately, and the PoS chain will almost achieve an overwhelming victory.

ETHW members have also realized the seriousness of this problem and are trying to solve it.

A few days ago, the ETHW core team said that it was introducing a liquidity pool freezing technology to protect user funds. This is a simple and crude way, that is, to freeze the asset liquidity in the mainstream contracts on the PoW chain as soon as possible after the fork to prevent users, scientists, and hackers from using assets such as USDT that have been reset to zero to exchange for ETHW to make profits, and to make the entire network less chaotic as possible.

ETHW development team plans to freeze PoW chain liquidity pool

As of August 21, ETHW has announced three batches of liquidity pool contract addresses that will be frozen, including the funding pools of Uniswap, Aave, Compound and other protocols. The team also called on users to withdraw ETH stored in the liquidity pool before the fork to prevent it from being exchanged by scientists.

Indeed, when the entire PoW chain ecosystem is fragmented, the forked ETHW token may be one of the few valuable assets on the chain and the foundation for the future operation of the PoW chain. Once a large number of ETHW tokens fall into the hands of scientists, they will quickly sell them off for other valuable assets, which will undoubtedly be a further blow to the ecology and confidence of the ETHW fork chain.

However, in the view of many industry insiders, ETHW's "freezing" strategy cannot solve the fundamental problem of ecological fragmentation. Once it is separated from the support of the mainstream chain ecology, the value of ETHW will become insignificant.

Although the current prospects of ETHW are generally pessimistic, the core team is still preparing for the fork and has revealed some future plans. In an interview, ETHW community leader Alex said that the community currently has 300 to 500 programmers who can provide technical support, and it is expected that the first batch of DEX, lending, and stablecoin projects will be launched at the end of September, with a number of about 20. At the same time, the community will hold a project roadshow, and by the end of the year, the ecological applications on the new chain will take shape.

Judging from Alex's statement, ETHW seems to be ready to rebuild the ecosystem from scratch. But another question at this time is that by then, in addition to the PoS version of Ethereum, there will be a number of new public chains such as Solana, Avalanche, and BNB Chain. How can ETHW, which has expensive gas fees, poor performance, and lacks an ecosystem, compete with the public chain army?

It is worth noting that on the evening of August 19, Guo Hongcai, the leader of the ETH fork, posted a meaningful circle of friends, "I am just a beef seller. If the fork fails, it is normal. Forking is a highly difficult technical job, and there is a 90% chance of failure."