What Will We Get From an Ethereum Proof-of-Work Fork?

TL;DR

• After the Merge, miners who invested billions in mining equipment will find their whole business model obsolete. They will fork the existing Ethereum PoW and continue to mine the new forked version $PoW-ETH.
• Critical projects in the current Ethereum ecosystem will not support the PoW fork, the fork may become something like another ETC. But this doesn't mean there is no value exists in the fork chain.
• Some of these copied tokens may have some value, while others will just go to zero right after the fork happens.

Decode the Ethereum Proof-of-Work Fork

After Merge, Ethereum's consensus mechanism will switch from Proof-of-Work to Proof-of-Stake. In a PoS blockchain, new blocks are created by validators who stake their $ETH, and miners are no longer needed. Miners with Ethereum PoW mining equipment (such as ASIC Ethereum mining machines) on hand that, in total, are worth billions of dollars will soon find their heavy investment to become useless. Ethereum miners won't just leave their expensive equipment obsolete, they HAVE to find something to mine.

Therefore, it is quite well anticipated that miners will do a fork of the existing Ethereum PoW so that they could continue to make their equipment utilized and get $ETH-PoW rewards in parallel with the new PoS $ETH.

A Fork of What?

Ethereum has been forked before. The famous "The DAO" attack results in a fork of Ethereum (ETH) to Ethereum Classic (ETC). Ethereum Classic is also a blockchain-based on PoW consensus and can also be mined by Ethereum PoW miners. But since it's just a blockchain without much transaction activity right now, it obviously doesn't need that much arithmetic power.

Many other blockchains like BSC, Polygon PoS Chain, and Avalanche C-Chain are all forks (or just say, copies) of the original Ethereum code. The catch is that they only fork the original codes but not the current state of the Ethereum network, these forks chains develop their respective ecosystem from zero.

The new Ethereum fork proposed by miners is likely to be a complete fork of the current state of Ethereum. This means all smart contracts, tokens, and everything on the existing Ethereum will be copied and run on the new Ethereum PoW fork.

So basically, everything on Ethereum will then have two versions:

If I hold some tokens or NFTs in my on-chain wallet before the Merge, I will get a forked version of those tokens or NFTs in the new forked chain accordingly after the Merge. A copy of all the assets I hold will be generated, but this does not mean that the value of my assets has doubled.

Will the Fork Succeed?

Technically, forking a chain is not a difficult task, what is difficult is attracting users, builders, and developing a vibrant ecosystem with economic activities happening on the chain.

Up to now, the potential PoW fork hasn't gained enough consensus from the majority parties in the current Ethereum ecosystem.

• The largest stablecoin issuers, Tether and Circle have decided not to support the fork: This means even if you get a forked version of $USDT & $USDC, they will have no value at all since there is no backing asset for these forked stablecoins.
• The biggest oracle service provider, Chainlink, will not support the fork: Oracles are a critical component for DeFi protocols. Without functioning oracles, most DeFi applications, such as lending protocol or DEX cannot function properly.

Without the support of these infrastructure-level projects, the PoW fork is unlikely to gain success. Of course, infrastructure can be rebuilt, but it takes months, if not years, to rebuild reliable infrastructure. The Ethereum PoW fork is likely to become something like the current ETC, a blockchain chain formed primarily for speculative purposes. And it's inactive due to a lack of ecosystem.

This doesn't mean there is no value existing in a PoW Fork.

Where Does Value Exist in the Fork?

If the PoW fork happens, everything on the current Ethereum will have a copy on the new Ethereum PoW. Do these copied version assets have any value? This depends on the type of assets. Some of them are likely to retain some value in the new forked chain, while most of them will probably just go to zero.

Some Value Camp

$ETH-PoW will serve as the native token of Tthe forked Ethereum PoW. As long as some people use the newly forked Ethereum (whether for purely speculative trading or for real economic activities), $ETH-PoW will be used to pay the gas fee just as the current Ethereum. It is difficult to guess how much the $ETH-PoW will be worth, but it is definitely a non-zero value.

Protocol tokens may have some value as well. As long as someone using the protocol, the forked protocol tokens will have some value. For example, for the forked version of decentralized exchanges, if there are people trading on these exchanges, transaction fees can be generated, and the protocol tokens will capture their portion of the value according to their respective tokenomic designs.

The protocols on the new forked chain are like another multi-chain application scenario. Many existing protocols have been extended to multi-chain ecosystem. For example, in addition to Ethereum, Uniswap is now deployed on Polygon, Optimism, Arbitrum, and Celo. The only difference is that the Uniswap community is intentionally scaling to these networks, while Uniswap on the PoW fork is a reactive deployment. Whether the Uniswap community is willing to maintain and govern the version on the Ethereum PoW fork is another question. Since all DApp front-ends (websites) are hosted on centralized servers and maintained by teams or communities, if the teams and communities choose not to support, then those users will not get front-end support on the PoW fork. This means that for most ordinary users, smart contracts are forked on the Ether PoW but are not invoked at all. Of course, for those users who have some technical skills, they can skip the front-end and call the smart contract directly, but these users are a minority after all.

One more caveat, for most DeFi protocols to be functioning properly, a reliable oracle service needs to be built first. We may see huge chaos on the fork chain if a similar service like Chainlink is not rebuilt, e.g. massive liquidation due to no price data feed for lending protocol.

Zero Value Camp

All on-chain assets that are backed by real-world assets, such as fiat stablecoins $USDC, $USDT will be copied one for one. However, there is only one dollar deposited in banks by those centralized stablecoin issuers to back one dollar fiat stablecoin on-chain. Circle & Tether have made their choice to only consider the Ethereum PoS as the valid version of their stablecoins. This means the copied version of the forked Ethereum PoW will be backed by nothing, and thus their value turns to ZERO.

Since the Ethereum PoW fork will continue to be a Proof-of-Work blockchain, and it will never change to a Proof-of-Stake blockchain. This means all liquid staking protocols and liquid staked derivatives of $ETH will have ZERO value, the most obvious example is Lido Finance. Since liquid staking will not exist in Ethereum PoW, Lido Finance become useless, and the forked version of $LDO and $stETH have ZERO value. (Related Reading: $LDO's Governance Influence Over Ethereum)

Given that the $ETH-PoW will have a certain value, while $USDC, $USDT, and stETH will all be worthless on the new PoW fork. One obvious strategy is to borrow as much as $ETH as possible on the current Ethereum, collateralized by these stablecoins or other tokens you think will be worthless in the PoW fork. When the fork happens, you will get the same amount of $ETH-PoW according to your current $ETH holdings, and just leave those worthless collaterals to be liquidated. Aave has experienced a surge in $ETH borrowing utilization recently due to this strategy, and the community even proposes to pause $ETH borrowing temporarily in the period leading up to the Merge.

Upon the fork chain's start to operate, it is very likely to experience a huge dump on the $ETH-PoW as everyone rushes to sell to make a quick profit. In the initial time, the volatility of these forked tokens will be wild.

For NFT, Em…, a New Meme of Original Art?

If a wallet address now obtains a BAYC, it will get its corresponding PoW version on the Ethereum PoW after Merge, and all other NFTs will be copied in the same way. But NFTs are based on uniqueness and indivisibility, so if an identical copy suddenly appears, how can we determine which is the original and which is the copy?

The value of these forked versions of NFT is more subtle than that of a financial asset. NFTs are like works of art, their value is subjective and depends on the collective opinion of NFT collectors. In other words, the value of an NFT depends on whether collectors consider the NFT on the Ethereum PoS to be the original or the NFT on the original PoW fork to be the original. If NFT collectors believe that NFTs on the PoW fork are original because they were minted on Ethereum PoW in the first place, then those NFTs should even be more valuable on the PoW fork.

Also, Opensea has made it clear that it will not support PoW fork. As is the case with other DApps, the front-end site is maintained by the team. While users can still skip the front-end and call OpenSea's smart contracts directly, most users will face the dilemma of not having a website where they can neither see their jpegs nor make transactions.

Closing Thoughts

There will be a lot of uncertainty about what will happen if miners fork the entire Ethereum current state. But the good news is that we don't need to do anything, the fork will not affect anything on the Merged Ethereum PoS. All the assets we hold in our wallets or locked in smart contracts will not be affected in any way. All the chaos and uncertainty will only happen in the forked Ethereum PoW. The even better news is that we will also get a free forked version of all the assets currently on Ethereum, just like free sweets, take it and see how much it can be worth.