What should we really care about when Ethereum hard forks?

As the Ethereum PoS upgrade date approaches, more than one team in the community has publicly announced that they will hard fork Ethereum when The Merge occurs to retain Ethereum's traditional PoW mining mechanism. (The PoW chain tokens after the fork are collectively referred to as PoW-Tokens below)

With the launch of PoW-ETH futures trading pairs on some trading platforms last weekend and the advancement of preparations for various forks, it can be said that the hard fork that occurred simultaneously with the PoS upgrade is basically inevitable.

So, what impact will this fork have on the Ethereum ecosystem after the fork? How can ordinary Ethereum users protect their assets in this fork and even seize arbitrage opportunities?

How to view the Ethereum hard fork

First of all, let me state our basic view that we do not think this fork can bring much meaningful contribution to the Ethereum ecosystem. And given the previous work experience of the fork leader and the degree of technical preparation, this fork may not even be successful.

But even so, I still suggest that everyone pay some attention to this hard fork. First, most Crypto users hold some Ethereum assets to a greater or lesser extent. Therefore, if the hard fork is really successful, how to deal with the PoW-Token obtained for free after the fork is also a topic with certain practical guiding significance.

The second point, which I think is more important, is that by observing the problems that arise in the PoW chain ecosystem projects after this fork, we can better understand the operating logic behind it.

Therefore, the purpose of writing this article is naturally not to publicize this fork farce, but to better summarize and analyze the phenomenon of "simultaneous forking of ecological projects and public chains" which may actually occur for the first time.

What changes will occur to assets on the PoW chain after the fork?

1. Cross-chain assets

The cross-chain assets here refer to the generalized cross-chain that occurs through the "locked casting" model, including both the general cross-chain completed through the cross-chain bridge, as well as the generalized cross-chain such as recharging to the trading platform and issuing centralized stablecoins. For the basic logic of the generalized cross-chain, readers can refer to the relevant discussion in "When you are doing cross-chain, are the assets really transferred?"

(1) Assets that entered Ethereum before the fork: Directly reset to zero

Since the assets entering Ethereum are essentially redeemable certificates of the original assets issued in Ethereum using a locked-in casting model, the value of these certificates depends solely on whether they can still be used to redeem the original assets locked in the vault.

Therefore, after the Ethereum fork, the redeemable certificates issued in Ethereum corresponding to this type of asset vault forked into two identical versions, so the vault manager must actively choose which forked version to recognize as true and which one is false. The value of the unsupported certificate version will be directly reset to zero from the first moment of the fork.

This type of cross-chain assets has a very high market value in Ethereum, including but not limited to centralized stablecoins USDT and USDC, as well as WBTC and renBTC that cross through cross-chain bridges. Not surprisingly, the issuers of these cross-chain assets will choose to support the PoS version of Ethereum after the fork, so the PoW fork versions of these assets will return to zero directly after the fork.

( 2) Assets that left Ethereum before the fork: Most are expected to be permanently locked in contracts

For the ETH that crossed out from Ethereum to other chains before the fork, since the so-called "crossing out" actually just locked the ETH in the Ethereum contract of the cross-chain bridge and did not actually leave Ethereum, these ETH will also become the same amount of PoW-ETH after the fork.

However, if you want to unlock these PoW-ETH again, you need to re-cross the WETH that has been stepped out. At this time, the ETH locked in the PoS chain can definitely be unlocked smoothly due to official support. But for the PoW-ETH locked in the PoW chain, due to various reasons such as the front-end no longer being adapted and the team no longer supporting it, many users will probably give up claiming directly due to the increased difficulty of operation. Ultimately, many PoW-ETH are permanently locked in various contracts and become dormant assets.

The logic of stETH is similar to this. Assuming that Lido received the user's ETH and entered it into the Beacon Chain with the same locking and casting logic, the equivalent amount of PoW-ETH corresponding to these stETH will also be locked in the Lido contract. If it cannot be withdrawn smoothly, it will also become a locked asset and directly cause the PoW version of stETH to return to zero. (This part of the analysis is based on some speculation, if there is any error, please correct it)

(3) Assets in the trading platform: Depends on the attitude of the trading platform

For ETH that was recharged to the centralized trading platform before the fork (which actually also belongs to cross-chain in a broad sense), since these ETH are only hosted in the address of the trading platform, they will also receive the same amount of PoW-ETH after the fork.

As for whether these assets are directly taken by the platform or returned to users in proportion, it depends on the specific policies of each platform.

2. Loan Agreement

After the fork, the lending protocol on the PoW chain is expected to be the DeFi infrastructure that will suffer the most disruption.

Because almost all 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 will mainly depend on whether the oracles they use can continue to operate on the PoW chain after the fork.

At present, most mainstream lending protocols use Chainlink or Uniswap as the main source of quotation information. Among them, Uniswap is less dependent on the outside world, and it can be assumed that it can continue to operate according to the pre-set logic. If Chainlink wants to support the PoW chain after the fork, it must be actively adapted by the official team.

According to the official announcement of Chainlink, it will not support any PoW forked version of Ethereum. Therefore, it can be said that this decision has basically sentenced the forked lending protocols to death. If the official teams of these lending protocols are not interested in changing the oracle of the PoW forked version of the protocol, then the various assets locked in them may not be withdrawn.

3. AMM

Compared with lending protocols, decentralized trading platforms that adopt the AMM model are truly self-consistent DeFi protocols that do not require external input information to operate normally.

It is expected that both Uniswap and Curve will operate normally after the fork, and due to the authorization restrictions of Uniswap V3, the PoW version of Ethereum after the fork may be the only public chain that has deployed the V3 contract besides the orthodox Ethereum.

Of course, for these DEX protocols, more risks will come from specific fund pools. For example, the USDC-ETH fund pool before the fork will be quickly emptied by the PoW version of USDC holders, which will soon return to zero. Therefore, holders of the corresponding LP market-making positions before the fork can also consider withdrawing their LP positions as soon as possible to avoid impermanent losses.

Of course, if the fork is ultimately unsuccessful, or PoW-ETH is worth nothing, it doesn’t matter.

4. Small Image NFT

To be honest, for most small picture NFT projects, there is really no substantial difference in form between the forked NFT version and the orthodox PoS version. After all, for such NFT projects, what is really reflected on the chain is just a coin issuance contract that stores the link to the picture address.

Of course, for the NFT ecosystem, the more critical issue may be whether the forked Opensea can still operate normally. I really haven’t done much research on this aspect, so I will make a bold guess here. The order instructions before the fork may still be valid, but the more important issue for ordinary users is that the web front end originally used for interaction will directly support the PoS version of Ethereum.

Therefore, an important prerequisite for realizing the above logic is that there must be at least an interactive interface for ordinary users to interact.

5. What about the front end?

Yes, after all this talk, the front-ends of all these projects will not automatically fork into two versions with the fork of the mainnet. Therefore, at least someone has to fork and debug the operating interfaces of these applications before ordinary users can interact with the applications on the forked PoW chain. Or, at least a PoW version of the blockchain browser should be forked so that people can at least interact with the public chain through specific contract instructions.

So, who will complete these important tasks? The official teams of these mainstream projects are probably not interested, but it is also risky to rely on Bao Erye to get these things done. Now there is about a month before the expected fork date, and I hope someone has reminded him that there is such an important work to be done.

What can ordinary users do?

According to the above analysis, if ordinary users want to maximize their own interests, they can theoretically adopt the following strategies. (Risk warning: The expected risk and difficulty of the operation are still quite large, and it is not recommended for novice users to interact blindly. In addition, this is only a theoretical analysis, and there may be significant differences from the actual complex situation.)

Before the fork

• The main goal of this phase of action is to prevent ETH from being locked in the contract after the fork.

• WETH that has crossed out from the Ethereum mainnet crosses back to the mainnet;

• Coins that will return to zero after the fork can be pledged to borrow ETH first: This strategy may face relatively high interest rates before the fork, so you need to choose carefully;

• Propose forks such as ETH from various DeFi protocols;

• Withdraw the “ETH-forked zero-coin” position in the AMM pool to avoid impermanent loss;

• ......

After the fork

• While many AMM pools of USDT still have prices after the fork, sell these tokens and exchange them for PoW-ETH as soon as possible: This strategy has a high threshold for ordinary users, and may also encounter gas wars and MEV arbitrage, etc. If the fork really happens, then a big battle is expected to occur in the first few blocks after the fork.

• Deposit the forked PoW-ETH into the supported trading platform and sell it: As long as we are united, we can smash the dealer together after the fork (nonsense)

• The intrinsic value of most of the forked ecological tokens will depreciate or even return to zero because the protocol cannot function properly. Remember to sell them in time if you have the chance;

• ......

Pay attention to asset safety

To be honest, if this fork is successful, the phenomena that will occur on the forked chain will be completely beyond the scope of individual rationality. Therefore, for ordinary users, it is not excessive to emphasize the risks.

At present, in addition to the risks of replay attacks that may occur after the fork, other possible risks include: fake wallets that cheat on mnemonics, fake webpages that phish, ETHW futures listed on small exchanges that do not allow withdrawals after the fork, deposits that cannot be credited, PoW-ETH transfers between different trading platforms that are lost, transfers of different PoW-ETH, and so on.

So while you are busy picking up bargains, be sure not to let your home be robbed.

Can the forked PoW chain achieve long-term development value?

After reading the above, you will understand that although nominally this fork will inherit all the status and projects of Ethereum before the fork, due to various problems, the PoW version of the forked chain will eventually inherit a fragmented Ethereum ecosystem.

So how much practical significance such an ecological fork has is a question worth questioning.

In addition, for an ecological public chain, the core concept of its operation will greatly affect the subsequent development trend of the ecology. So what advanced concepts do the teams leading this fork hold?

Here are some excerpts from their promotional copy:

"In 2021, the evil is revealed:

In order to reduce the total supply of ether in circulation, the Ethereum team ignored the miners who had supported them and released the EIP-1559 protocol. Miners, the original supporters of Ethereum, were exploited and extorted by the new protocol, and most of their packaging revenue was burned on the chain. Thousands of miners suffered a significant loss of profits.

In 2022, I finally became a dragon:

The former dragon slayer has raised his sword again, forcing the miners who have been kind to him to accept The Merge consensus, abandon Pow and embrace Pos fork. Not only will he exploit the miners, mining pools and miners who have been kind to him, but he will also tear them apart. The miners' billions of investments will be lost, which is terrifying to see."

Honestly speaking, this statement cannot even be compared with Vitalik’s understanding of blockchain. Even if it is measured by the most basic value scale of modern society, it is completely unqualified.

After all, in modern society, no matter how different the division of labor between different market players is, they are equal in terms of personality status. In an open and fair market, people reach transactions according to the rules, fulfill their obligations and obtain rewards according to the contract.

However, in the above declaration, the project team directly simplified the cooperation between miners and Ethereum into a relationship of nurturing and repaying, which is almost like shouting out the slogan "ruler is ruler, subject is subject, father is father, son is son". This kind of thinking is not only completely inconsistent with the spirit of blockchain, but it can even be said that it does not even have the basic spirit of market economy.

The above statement, which has a strong "Chinese flavor", reminds us again of the unspoken rule in the industry that Chinese projects are not to be invested in. But in fact, the real conflict between the two is not even the difference between Chinese and Western cultures, but the fundamental difference between pre-modernity and post-modernity.

Of course, a more likely explanation is that this narrative style is likely a way for them to intentionally or unintentionally accurately screen target users. After all, groups that believe in certain specific narratives have been repeatedly proven to be the easiest group of leeks to be harvested in the circle.

Finally, let me end this article with a passage that has been widely circulated in the past two days:

“Those who pushed for the Ethereum hard fork to keep the POW mechanism only want to make money. Many of the KOLs who led this fork are notorious bad guys in China. People are advised not to participate in the ethw hype.”