Why the Ethereum Merge Will Cause Price Volatility on ETHPoW

As the hours tick down until the Ethereum Merge, the plans of die-hard proof-of-work advocates are coming into focus — as are the growing prospects for volatility for the up-and-coming token.

The Merge is set to transition the Ethereum blockchain’s mechanism for processing and validating transactions from proof-of-work — a similar mechanism to that of Bitcoin, albeit technically distinct — to proof-of-stake, likely sometime early Thursday morning ET. 

A relatively small, but vocal, minority of ether miners preparing to fork the protocol recently tweeted “ETHW mainnet will happen within 24 hours after the Merge.”

“The exact time will be announced 1 hour before launch with a countdown timer and everything including final code, binaries, config files, nodes info, RPC, explorer, etc. will be made public when the time’s up,” the tweet said.

Not everyone is as optimistic about the contrarian project’s viability — over the short or long term.

ETH holders will be airdropped ETHPoW tokens at a 1:1 ratio, but the token will have very limited places where it can be spent or used, making it obsolete.

Sunny Aggarwal, co-founder of Osmosis Labs, told Blockworks “most of the tokens on ETHPoW are going to go to zero.” 

Circle, the issuer of USDC — the largest dollar-backed stablecoin issued on Ethereum blockchain with a market capitalization of more than $45 billion — confirmed that the company plans to fully support the PoS chain post Merge. DeFi projects employing USDC for collateral, as such, ought to have virtually zero value on the PoW chain.

Instead, its staking-friendly counterparts are primed to reap the benefits, according to Kiril Nikolov, part of Nexo’s strategy team.

“The Merge is not only making the network more secure and eco-friendly — it’s also making ETH better money and a better store of value,” Nikolov told Blockworks. “With its staking yields, it will generate an infinitely scalable, long-term source of revenue for digital asset institutions, lenders and exchanges.” 

The Merge is expected to bring 7%-14% yields on its first day, Tom Dunleavy, senior research analyst at Messari, tweeted.

Even still, Aggarwal said the ETHPoW token will likely still have some element of intrinsic value. 

Decentralized protocols, such as Uniswap that don’t run via oracles — or bridges between a given blockchain and other asset classes — are supposed to continue to function on ether’s proof-of-work version.

“Uniswap doesn’t require oracles,” Aggarwal said. “It doesn’t have any dependencies, so it can still keep working,” he said. 

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After the Merge, a simple way to be able to differentiate between ETH PoS and ETH PoW will be by examining chain ID, or a unique series of numbers that effectively tells a smart contract what blockchain in question a given asset originates from.

When Ethereum Classic and Ethereum went through a hard fork — a foundational event that triggers a crypto protocol to splinter into two or more blockchains — in 2016, developers for both parties were reluctant to alter their respective identification mechanisms. The move allowed for so-called “replay” attacks, where transactions on the former ledger were also deemed valid on the latter.

But, in the Merge’s case, that’s unlikely. Proof-of-work developers have already confirmed the plan is to use a more-modernized verification solution as a viable workaround.

Article updated at 4:19 am, Sept. 15 to correct Nikolov‘s role.

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