If Ethereum is forked, where will the on-chain ecosystem go?

Author: Kyle, Beehive Tech

The Ethereum merge is imminent, and the Ethereum fork led by cryptocurrency KOL Guo Hongcai (alias Bao Er Ye) has attracted a wave of attention. He aims to protect the interests of PoW miners and does not support the PoS mechanism of Ethereum after the merge, opting instead to fork out a chain called EthereumPow (ETHW).

ETHW attempts to introduce liquidity pool freeze technology, freezing the main liquidity pool contracts on the PoW chain immediately after the fork to prevent scientists from exchanging unrecognized assets like USDT for ETHW tokens, and to keep the on-chain ecosystem as orderly as possible.

The determination to fork ETHW appears very firm. If the fork does occur, the future of the Ethereum chain ecosystem will become the focal point.

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

Many industry insiders believe that without the support of mainstream ecosystem projects, the post-fork PoW will face the collapse of its on-chain ecosystem. This fork dispute may quickly determine a winner.

ETHW community leader Alex revealed that they have gathered 300 to 500 programmers to provide technical support, and the first batch of DEX, lending, and stablecoin projects is expected to launch by the end of September. This indicates that ETHW seems ready to reconstruct its ecosystem from scratch. However, the question remains: how can ETHW, with high gas fees, poor performance, and a lack of an ecosystem, compete with the PoS version of Ethereum and numerous emerging public chains?

The Ethereum Fork Event Continues to Ferment

On August 19, the latest Ethereum core developer meeting reaffirmed the total terminal difficulty (TTD) that triggers the Ethereum merge, and as previously planned, the Ethereum merge is expected to officially start around September 15.

As one of the important steps in the Ethereum 2.0 upgrade process, the merge of the Ethereum mainnet with the Beacon Chain's proof-of-stake system marks the elimination of Ethereum's proof-of-work mechanism (PoW). After the merge, Ethereum will transition to a proof-of-stake mechanism (PoS). The miners who originally served as validators on the Ethereum network will exit the historical stage, and Ethereum under the PoS mechanism will adopt staking validation, reducing Ethereum's energy consumption by approximately 99.95% after the merge.

The highly anticipated merge event has added more uncertainty due to the emergence of the "fork faction." Guo Hongcai, who was active in the Chinese cryptocurrency scene, believes that the shift in Ethereum's consensus mechanism is a betrayal of the original miners and will lead Ethereum towards centralization. Therefore, he hopes to unite Ethereum developers, the community, and miners to initiate a hard fork during the Ethereum merge, which would not support the PoS chain but instead make 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, featuring key characteristics such as disabling the difficulty bomb, abolishing EIP1559, and adjusting the starting mining difficulty of ETHW. "Abolishing EIP1559" aims to "return" gas fee benefits to PoW miners—after the Ethereum London upgrade last August, EIP1559 took effect, and most gas fees on the Ethereum network were automatically burned, no longer distributed to miners.

As the preparations for the fork progress, the momentum of ETHW, led by Guo Hongcai, is growing stronger. Tron founder Justin Sun has explicitly stated his support for the Ethereum fork, saying, "Currently, we hold over one million ETH. If this Ethereum fork is successful, we will donate some ETHW to the community and developers to support the construction of the Ethereum ecosystem."

Currently, trading platforms such as Poloniex, MXC, and Gate have preemptively launched two potential fork futures tokens: ETHS (representing a complete transition to the PoS consensus algorithm chain token) and ETHW (representing continued use of the PoW consensus algorithm chain token) and related trading markets.

Although the non-profit entity ETC Cooperative, which supports the Ethereum Classic ecosystem, wrote an open letter to Guo Hongcai sharing their experiences as "veterans" and explaining the many difficulties of implementing a fork, the determination to implement the ETHW fork appears particularly firm. The latter retorted to ETC Cooperative, stating that ETC has not grown since its inception. Over the past four to five years, it has stagnated, failed to establish any ecosystem. "It is conceivable that ETC will continue to be a giant baby in the future."

At the same time, ETHW issued an ambitious statement clarifying its attitude towards the fork, "We are willing to rally the community to make this attempt."

Mainstream Ethereum Applications Support ETH-PoS

In the history of Ethereum's development, there has been a chain fork event. In 2016, Ethereum's largest fundraising project, The DAO, was hacked. To remedy the funds, the Ethereum core development team proposed EIP-779, allowing everyone to roll back blocks to withdraw their ETH from the DAO's contract. However, some community members who adhered to fundamentalism believed this violated the immutable spirit of blockchain, leading to a fork of Ethereum into two chains: the original chain is now Ethereum Classic (ETC), and the new fork is the current ETH, both using PoW consensus mechanisms.

In the following years, the ETH ecosystem rapidly developed, with the emergence of DeFi, NFTs, DAOs, and other applications greatly enriching the on-chain ecosystem. According to data from OKLink, at its peak, the total locked value on the ETH chain exceeded $160 billion.

Compared to 2016, today's ETH is incomparable, and implementing a fork is not merely a simple matter of supporting one chain or another. It is important to note that the continuous growth of ETH's market value primarily stems from the expansion of the on-chain ecosystem. Once ETH undergoes another fork, the final choice of which chain the on-chain ecosystem supports will determine which chain can truly become Ethereum in the future.

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

However, while users may double their asset quantity, the value will not double. For example, if a user holds 10,000 USDT on the current ETH chain, after the fork, the user will hold 10,000 USDT on both chains, but the dollar reserves corresponding to these assets will still only be $10,000. Therefore, the user essentially still possesses USDT worth $10,000, and which chain's USDT can be exchanged 1:1 for dollars depends on which chain the USDT issuer Tether supports.

The same logic applies to whether users hold stablecoins like USDT, USDC, or DeFi protocol assets like UNI, COMP, or NFTs like CryptoPunks and BAYC. The final value attribution depends on which chain the stablecoin issuers, DeFi protocols, and NFT issuers choose. If a protocol supports both chains simultaneously, then, assuming the market cap of that protocol remains unchanged, assets on both chains may decline simultaneously, ultimately resulting in a situation where the combined value equals that of a single asset.

As of now, multiple Ethereum on-chain application providers, stablecoin issuers, mining pools, and exchanges have made their positions clear regarding 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 the Ethereum PoS chain." Tether indicated that it will support PoS Ethereum according to the official timeline. A smooth transition is crucial for the long-term health of the DeFi ecosystem, including platforms that use USDT.

As the largest on-chain stablecoin trading protocol in the market, Curve Finance also issued a statement indicating that it will choose the chain selected by stablecoins. It stated that Curve DAO cannot force a choice between the forks, but only the chain chosen by stablecoins is feasible for Curve DAO.

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

BAYC issuer Yuga Labs also stated that to align with the broader Ethereum community, in the case 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 interlinked and mutually supportive, making it difficult to operate independently. This will create a "domino effect."

One example is the scale effect of oracles. Currently, almost all on-chain lending protocols involve liquidation mechanisms, and accurate liquidation must rely on the precise pricing provided by oracles. Therefore, whether lending protocols like MakerDAO, Aave, and Compound can continue to operate depends on whether the oracles they use support the PoW chain.

Previously, the most mainstream oracle, Chainlink, officially announced that it would not support any PoW forked version of Ethereum. Subsequently, Aave also stated that due to the lack of oracles and related liquidity issues, Aave cannot operate normally on any PoW chain, and it has initiated a community proposal to commit to choosing the PoS version of Ethereum as the main chain.

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

In contrast to the support for PoS Ethereum from many mainstream stablecoin issuers and DeFi protocols, there are few voices in the market supporting ETHW. Aside from Justin Sun's Tron projects and PoW miners, few applications have indicated they will choose ETHW.

Most trading platforms are "neutral," with Binance and OKX both revealing that future listings of new forked tokens will be evaluated according to listing standards.

The Fork Dispute May Quickly Determine a Winner

The fork dispute is essentially a battle of consensus. From the current statements of Ethereum ecosystem applications, the support rate for the PoS version of Ethereum holds an absolute advantage, especially with supporters like USDT, USDC, and Chainlink playing extremely important roles in the Ethereum ecosystem. Their "alignment" is likely to influence the final outcome.

After the Ethereum fork, various protocols and asset issuers will have two identical versions of their corresponding assets, so the "treasury" managers must actively choose which version to recognize as true, while the value of the unsupported version's assets will drop to zero the moment the fork occurs.

Taking USDT and USDC as examples, as important assets supporting the operation of the DeFi ecosystem, these two mainstream stablecoins play significant roles in DEX, lending protocols, and other applications. Since their issuers have indicated support for PoS Ethereum, the USDT and USDC on the PoW chain after the fork will become worthless, and the entire on-chain ecosystem will fall into massive chaos.

For instance, in the USDT-related liquidity pool on Uniswap on the PoW chain, as the value of USDT drops to zero, everyone will quickly sell off USDT, potentially causing a short-term rise in other assets like ETHW. At this point, the Chainlink oracle does not support that chain, and the lending protocol cannot receive accurate price feeds, easily triggering large-scale liquidation incidents.

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

Therefore, many industry insiders analyze that once the fork is completed, the outcome will be immediately determined, with the PoS chain likely achieving overwhelming victory.

ETHW members have also realized the seriousness of this issue and are attempting to address it.

A few days ago, the ETHW core team stated that they are introducing a liquidity pool freeze technology to protect user funds. This is a straightforward approach, freezing the liquidity of assets in mainstream contracts on the PoW chain immediately after the fork to prevent users, scientists, and hackers from using worthless USDT and other assets to exchange for ETHW for profit, and to keep the entire network as orderly as possible.

As of August 21, ETHW has announced three batches of liquidity pool contract addresses that will be frozen, including pools from protocols like Uniswap, Aave, and Compound. The team has also called on users to withdraw their ETH stored in liquidity pools before the fork to prevent them 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 that 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 for other valuable assets, which undoubtedly further undermines the ecosystem and confidence in the ETHW forked chain.

However, many industry insiders believe that ETHW's "freeze" strategy does not solve the fundamental problem of ecosystem fragmentation. Once it is detached from the support of mainstream on-chain ecosystems, ETHW's value will become negligible.

Although the current outlook for ETHW is generally pessimistic, the core team is still preparing for the fork and has revealed some future plans. ETHW community leader Alex stated in an interview that the community currently has 300 to 500 programmers available for technical support, and the first batch of DEX, lending, and stablecoin projects is expected to launch by the end of September, with around twenty projects. Additionally, the community will hold project roadshows, and by the end of the year, a preliminary form of ecosystem applications on the new chain will take shape.

From Alex's statements, it seems that ETHW is ready to reconstruct its ecosystem from scratch. However, another question arises: how can ETHW, with high gas fees, poor performance, and a lack of an ecosystem, compete with a host of new public chains like Solana, Avalanche, and BNB Chain, in addition to the PoS version of Ethereum?

It is worth noting that on the evening of August 19, Guo Hongcai, the leader of the ETH fork, posted a thought-provoking message on social media, "I am just a beef seller. If the fork fails, that is also normal. Forking is a highly technical task, and there is a 90% chance of failure."