Ethereum is carrying out a large-scale update – known as ‘the merge’ – to convert its network from PoW to PoS. Miners are protesting and are making moves to create a new coin, tentatively called ETHW. Why are they protesting? And will this new Ethereum coin be able to beat the existing Ethereum?
Why miners are moving to mint ETHW after the Ethereum merge
The merge is an important step in the process of converting the Ethereum network towards the Proof of Stake (PoS) method. The step involves combining – or merging – the existing Proof of Work (PoW)-based main net with the Proof of Stake-based test net, which has already been created. After this merge, the Ethereum network begins to function based on PoS in earnest.
The Ethereum Foundation has recently officially confirmed the planned merge date. The merge consists of two processes dubbed Bellatrix and Paris. Bellatrix is set to run on September 6 at 11:34am UTC, and Paris from September 10-20. If all things go according to plan with Paris, the process is expected to be completed within a total of 13 minutes.
Changing the Ethereum network to PoS through the merge also means changing the cryptocurrency minting mechanism. Under the previous PoW method, miners solved complicated mathematical equations to validate transactions on the blockchain network. In return, each newly generated block also meant that a new unit of cryptocurrency was created. By contrast, the PoS structure replaces miners with validators, who are rewarded for their contributions to the network in proportion to the number of coins held (staked) as new cryptocurrency is created.
This means that the existing PoW miners will no longer be able to mine Ethereum. Miners who invested in energy generation facilities to mine must either turn to other minable PoW cryptocurrencies or find other sources of revenue. Accordingly, they are responding by seeking to issue separate Ethereum PoW (ETHW) coins to maintain their source of income. According to crypto analysis firm Messari, the size of the Ethereum mining industry is estimated to be around $19 billion.
ETHW creators and supporters
One of the founding figures in the movement to support an Ethereum hard fork is Justin Sun, founder of Tron and de facto owner of the US-based cryptocurrency exchange Poloniex. Poloniex supports trading of IOU tokens for the PoS-based ETH (dubbed ETHS), that will exist after the merge, and PoW-based ETH (dubbed ETHW). IOU tokens are coins that circulate for pre-trading before the official issuing through an ICO. Given that they allow trading tokens before they are in official circulation, IOU tokens function similarly to futures. By providing ETHW with an opportunity for price discovery, this move takes them from the being a mere narrative to something more tangible. Following Poloniex, BitMex, MEXC and other exchanges also announced support for ETHW trading, thereby increasing the coin’s market presence.
With ETHW IOU tokens, futures trading support and other actions, there are moves on the market to support an ETHPoW hard fork. To date, Binance – the world’s largest crypto exchange by trading volume – as well as Coinbase, Plonix, Huobi, BitMEX and more have either listed PoWETH transactions or have hinted at the possibility. In a recent statement, Binance said “We will not rule out support for ‘Ethereum PoW’ coin”, adding that it would “proceed with evaluation of the new coin”.
On the other hand, Tether, issuer of the stablecoin USDT, and Circle, issuer of USDC, both officially declared that they would only support Ethereum converted to PoS after the merge. “The merge upgrade is the most significant moment in blockchain history”, Tether said in a statement on September 10, adding that “it’s important that the transition to POS is not weaponized to cause confusion and harm within the ecosystem”.
Can ETHW succeed?
The response to ETHW has been extremely divisive. The mainstream Ethereum community does not consider an ETHPoW hard fork to have any value. As evidence, they point out that the most commonly used fiat-collateralized stablecoins USDT and USDC support a PoS-based chain.
Stablecoins serve as a link between fiat and cryptocurrency and are also used as the base currency for numerous DeFi (Decentralized Finance) services. With a combined share of over 60% by transaction volume, USDC and USDT also have a commanding lead among stablecoins on the Ethereum network. While DeFi protocols that work without either of these coins do exist on the Ethereum network, because DeFi projects are organically connected to each other, the ETHPoW chain’s DeFi ecosystem would be greatly reduced without USDT/USDC. Detractors argue that if USDT and USDC lose their value on the ETHPoW network, it will become difficult to normally operate the DeFi services based on these coins, leading to a collapse in value.
Another issue raised is that because at least a certain level of development is required to maintain applications that run on Ethereum, project teams with limited resources are more likely to choose a PoS chain instead of PoW.
On the other hand, some argue that ETHPoW will retain a significant number of users and continue to create use cases while maintaining applications. ETHPoW proponents, such as Kevin Zhou, founder of cryptocurrency hedge fund Galois Capital, argue that PoW-based Ethereum chains have a long track record of stable operation, so users who prefer the status quo may remain. They also consider the fact that no PoS chain has ever been operated on the scale of Ethereum as a weak point of the pro-PoS faction.
Another point raised is that PoW chains may be preferred by those concerned about the centralization and security issues of PoS-based Ethereum. In a PoW-based network, miners are naturally spread out geographically to secure an inexpensive supply of electricity. PoW supporters argue that the process of miners creating blocks and node operators verifying them is more secure than PoS chains, where there is a risk of large intermediaries such as exchanges and brokers exerting influence by amassing a lot of coins.
They argue that 65% of Ethereum staking is concentrated on a few players – such as Coinbase, Kraken and Lido Finance – and that this centralization poses a security risk, due to which people concerned about security breaches might prefer a PoW-based chain. A final argument brought in favor of ETHPoW is that there are many chains, such as Ethereum Classic (ETC), that maintain at least a certain level of value despite having relatively poor networks.