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PoW ETH Fork Gathers Steam

by Zhong Yang Chan

It has been a crabby week as BTC and ETH continue to chop and consolidate, oscillating within last week’s ranges. 

Source: CoinGecko

Certain alts have started to outperform with seemingly random pumps, a vast majority of which are listed on Binance. Bull-ievers are hoping for it to breakout while bears are calling for the end of the dead cat bounce. We have breached 24k for BTC and 1.8k for ETH but that was short-lived. Nothing much has changed from a price standpoint, however, there have been quite a few macro-changing developments that might impact the larger market narrative. 

 

More US Jobs than Expected

July was an incredible month for the US labor market. Many anticipated less hiring in light of worsening macro conditions, but nonfarm payrolls rose 528,000 for the month while the unemployment rate was 3.5%. This far exceeded Dow Jones estimates of 258,000 and 3.6%, respectively. Wage growth also surged higher, as average hourly earnings jumped 0.5% for the month and 5.2% compared to a year ago. In short, the report showed the labor market remains strong despite other signs of economic weakness.

While this is great for the economy on paper, there are more negative implications for the stock/crypto market. The economy is doing poorly despite the increased number of jobs. In short, the purchasing power of the people are much lower. Any hopes for lower Fed interest rates are now gone. Pundits expect a 75 basis-point increase at the Fed’s meeting on September 20-21, compared with 50 basis-point calls before. Some are even calling for 100bps. All roads point to a drawn-out inflationary environment.

That being said, there is some time before the Fed makes a decision. Not to mention that they would have to consider one more employment print and two consumer-price index readouts before their September meeting.

 

Taiwan = Ukraine of the East?

We aren’t going to pretend to be geopolitical experts but ever since the Ukraine-Russia war broke out, we cannot ignore a similar situation in the East; namely, the rising tensions between US Taiwan and China. 

The gist of it is that China has always been exerting territorial claims over Taiwan while Taiwan asserts it is a sovereign democratic country, separate from the Chinese government. The relationship has been tenuous for decades but have drastically deteriorated overnight after Nancy Pelosi, Speaker for the US House of Representatives visited Taiwan. 

Following the visit, Beijing immediately responded with military exercises spread out over the week, which included targeted missile launches that flew over Taiwan into the sea. China says its military exercises are focused on six danger zones around Taiwan, three of which overlap the island's territorial waters. If you want a more detailed summary of the current state of affairs; check out the article by BBC here.

While the US has been cautious in their foreign relations with Taiwan, that approach has changed ever since Biden came to term as President. Officially, the US does not have any formal ties with Taiwan, only China. However, in May, Biden stated that they would defend Taiwan militarily if war ever broke out. 

Like Ukraine, the US has every incentive to ensure that Taiwan remains an independent nation. For one, the island is a strategic location for keeping China’s military movements in check, especially from nearby US military bases, as well as the SEA region. Secondly, Taiwan is the biggest semiconductor manufacturer in the world, with a significant pie of the global supply for chips, and the US being highly dependent on them for supplies (as well as from South Korea too). Having that amount of resources and wealth fall into China’s hands would only grant them more economic power, and would have a strong impact on US supply chains. Lastly, Taiwan is one of the US’s biggest customers for weapons.

All this might just be a nothingburger as it always has been whenever it comes to Taiwan and China. However, we would just like to reiterate that the same mindset was prevalent during the leadup to the Ukraine crisis. We can only stay abreast of the facts by closely monitoring the situation.

 

PoW ETH Gathers More Steam

Following on from last week’s Market’s article where we spoke about a potential PoW fork of ETH, the movement has been rapidly gaining steam and progressing. A website and Twitter handle have been quickly put together, with a whitepaper “coming soon”. 

Chandler Guo, the main promoter of the PoW ETH fork, also announced last week (in Chinese) five key principles which will guide the governance of the fork:

  1. No pre-mine, no additional issuance, entirely fair launch

  2. Maintain PoW as the long-term base consensus layer for the chain

  3. Revoke EIP-1559, thereby restoring profit margins for miners to before the Ethereum “burn” mechanism was implemented

  4. Insist and maintain decentralized governance, and remove personality-cults from the management of the chain

  5. Disband the initial PoW ETH governance team within 3 years to become fully autonomous

Source: https://ethereumpow.org/

As expected, the website boasted support for the fork from significant Ethereum miners, as well as a bevy of centralized exchanges, though at the moment only Poloniex, MEXC, Gate, and Huobi (not on the chart above) have made official announcements that they will support the fork.

ETHW and ETHS

In particular, Poloniex, MEXC and Gate have each gone ahead to create and list two new assets for trading - ETHW (PoW ETH) and ETHS (PoS ETH) on their respective exchanges. These serve as IOUs for tokens to come post-Merge, and a successful PoW fork of ETH. It’s important to note:

  • While all 3 exchanges use the ETHW and ETHS ticker names, they are actually distinct tokens on each exchange and at time of writing we are tracking them separately here ETHW (Poloniex), ETHS (Poloniex), ETHW (MEXC), ETHS (MEXC), ETHW (Gate), ETHS (Gate).

  • These assets do not appear to be on-chain tokens. Instead, they seem to be just centralized assets whose records are stored by the respective exchanges. 

  • They are not fungible with each other as far as we can tell.

  • Deposits and withdrawals are not enabled for these tokens.

Users on these exchanges can swap their ETH for an equal amount of ETHW and ETHS (1ETH = 1ETHW + 1ETHS), and vice versa, and some initial trading pairs have been deployed. However thus far only the Poloniex ETHW:ETH and ETHS:ETH pairs have any form of meaningful volume. 

Source: Poloniex

These initial IOU ETH tokens serve as speculative instruments as the situation approaching the Merge becomes increasingly murky. The thesis is that if you’re bullish the PoW ETH fork, you’ll be able to start accumulating ETHW on the cheap, while also being able to dump ETHS now while it still trades close to ETH, and vice versa. 

Increasingly the PoW fork is being discussed as a firm reality, though significant challenges remain. There has been increasing speculation, primarily led by Kevin Zhou of Galois Capital, on how much market share can ETHW take away from ETH post-fork. 

From prices on Poloniex, thus far participants seem to be pricing in a ratio that is closer to 7-93. It’s still too early to tell if this will hold (and whether the same ratios will even hold across different CEXes), but it’s something that will be worth paying attention to as an indicator of support for the PoW fork.

Wither ETC

Obviously ETH has forked before into ETC way back in 2016 after the DAO hack. This gives us some historical context on whether forks have managed to successfully take away market share from ETH.

Source: CoinGecko

The ETC-ETH market cap ratio reached its peak on August 2, 2016 shortly after the fork, at 25-75, before a pretty steady decline. Context is important here - in 2016 there were barely any significant dApps on ETH, and the creation of the ill-fated DAO was actually to act as an ecosystem fund to incentivize projects to build dApps. ETH then was still, for all intents and purposes, a speculative instrument / early bet on an emerging decentralized platform. 

ETH today is a much more richer ecosystem, and if the PoW ETH team is unable to rally support from existing ETH projects and dApps, let alone create new ones, it’s hard to see path to significant or sustained migration of value. The ETC-ETH ratio currently stands at 2.4-97.6, despite the healthy run-up that ETC has experienced in the past month or so. 

Price of ETC has been holding steady last week at between $35 - 40, perhaps buoyed by the fact that certain other CT personalities have come out in support of it instead of a new PoW fork.

The hashrate on ETC has also remained steady at ~30TH/s.

Significant Challenges Remain for the Fork

It bears mentioning again that there are still significant hurdles and challenges to the fork. We highlight a few here:

  • On the protocol layer, there is significant engineering effort to reverse EIP-1559 and the Gray Glacier upgrade to remove the mid-September difficulty bomb. A new client will need to be created for miners to run the fork, and longer term, a new core dev team will need to be spun up to continue to maintain the protocol.

  • On the infrastructure layer, it remains to be seen if the most widely used RPCs and wallets, will support the fork, especially given that Infura and Metamask are both operated by Consensys. If not, new ones will need to be spun up.

  • On the dApp layer, whether teams will continue to maintain their dApps on the fork remain to be seen. Significantly, Chainlink has already announced that they will not support any PoW fork, which will probably break many of the most widely-used DeFi protocols. Aave has already called out this risk informing users that there is no plans to support the fork and Aave on PoW ETH is “dead on arrival”. 

  • On the token layer, while the native ETHW will likely be listed and supported by at least several CEXes at launch, whether the other thousands of ERC20 tokens (and NFTs for that matter) will receive the same treatment remains to be seen. Exchanges will likely wait to see if the fork gains any traction before committing to list more tokens. 

  • Specifically for centralized stablecoins, i.e. the likes of USDT, USDC and BUSD, they will immediately require an infusion of new capital to back these stables on the fork. Vitalik has called them out as a “significant” decider of which blockchain protocol the industry would “respect” in hard forks. 

 

Other Things to Watch Out For

  1. While it’s a quiet week for macro, the US CPI data for July will be released this Wednesday, August 10, which will give observers an indication of whether the Fed rate hikes are having its intended effect of taming inflation in the US. Thus far the labour market has remained tight, and the price of WTI crude oil has been on a steady decline since early-June, giving hope of a lower CPI print.

  2. While the miners continue to plot a PoW ETH fork, the ETH Merge continues to progress, with the Goerli testnet fork in progress and scheduled for completion by the end of this week. If the Goerli merge goes well, the Core Devs will set a tentative Bellatrix epoch and tentative TTD for mainnet Merge on the Thursday, August 11 All Core Devs (ACD) call. 

  3. The US has imposed sanctions on money laundering mixing platform Tornado Cash after alleging that it is an avenue of money laundering for North Korean cybercrime hackers. Relying on Etherscan’s labels, any assets/users linked to it are sanctioned, barring any Americans from interacting with it. Notably, Github has also banned any accounts that are associated with Tornado’s repo after removing it. Meanwhile, Circle has blacklisted any USDC that is linked to Tornado. Such actions may be severe but are unsurprising given the increased regulatory scrutiny of the space. In fact, a narrative over privacy may form. Keep a look out on the movement of other privacy-related projects like ZEC, XMR, and SCRT.

 

This article was produced in collaboration with Benjamin Hor. You can follow him on Twitter here

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Zhong Yang Chan
Zhong Yang Chan

Zhong is CoinGecko's Head of Research. Prior to CoinGecko, he led the Innovation Department at the Securities Commission Malaysia and was a key driver in the formation of policies regarding cryptocurrencies, the classification of cryptocurrency as securities, and the implementation of crypto-related regulations. Follow the author on Twitter @zhongychan

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