[AMA Digest] Could the Ethereum Merge Splinter the Community?

• Ethereum’s merge will potentially splinter the crypto community
• There are both ideological and technical risks involved in this novel move, none of which are certain to be resolved in time
• Yet the associated ideological risks seem to be non-mutually exclusive either way, carrying with them the same concerns as PoW systems

We’ve been hearing about Ethereum’s supposed merge and detailed information about it, both supportive and detractive, have been circulating for years leading up to this revolutionary event. Yet it is undeniable that the merge has seen more distinct lines drawn between fundamentalists and fringe opposing groups, such as the sharp growth of ETHPoW, or Ethereum Proof of Work, the largest opposing group to the merge that has heightened concerns and tensions regarding a possible hard fork.

Ethereum’s merge will primarily see its transition from a Proof-of-Work (PoW) consensus protocol to a Proof-of-Stake (PoS) one. Conceptually, this novel shift will be the first of its kind in the industry and saw the entire crypto world looking on in bated breath to observe how such a transition will work out. Purported benefits, as championed by Ethereum Co-Founder Vitalik Buterin, include significantly reduced gas fees, faster transaction speeds, and a skyrocketing increase to 100,000 volumetric transactions per second.

Sharding, a later phase of the Ethereum merge project, will operationalise the latter by facilitating a significantly higher number of simultaneous transactions by working synergistically with layer 2 rollups by splitting up the burden of handling the large amount of data needed by rollups over the entire network. This will continue to reduce network congestion and increase transactions per second.

In layman’s terms, think of the current network speed of Ethereum as an escalator. It works and travels fast on its own, but what Sharding does is to create more escalators on either side of it to process more simultaneous transactions concurrently. The introduction of 64 shard chains will see 64 additional “escalators” being constructed, increasing the current scalability by 64 times.

While certainly promising, Ethereum’s merge is far from controversy and dilemma. The hard fork, which is already gaining unprecedented momentum in recent times as the merge looms ever closer, could potentially see a fragmenting of not only the second-largest cryptocurrency in the market, but also that of the crypto community as a whole.

To find out more about the risks associated with such a fork and the ideological concerns surrounding Ethereum’s merge, Coinlive spoke to Marcus Eng, Investment Lead and Business Development (Special Projects) at QCP Capital.

“The merge will certainly shift attention to Ethereum L2s, like Arbitrum and Polygon,” Marcus tells us. “But it's yet to be seen if Ethereum will expand to large corporations or agencies, or remain to serve the broader retail market.”

Indeed, the hard fork poses a significant challenge to not just the Ethereum organisation, but to existing miners themselves.

“As a miner, should I wait 2 weeks to farm ETC and try it out, or should I sell it as soon as possible now to avoid the risk of GPU prices crashing?” Marcus inquires rhetorically.

The miner’s conundrum serves as the genesis for the hard fork: a splintering away from the main Ethereum chain to create a separate one under different management. In so doing however, the proposed new “ETHPoW” chain will likely double liquidity on the main chain, Marcus warns, because nobody is going to know exactly what is supported and what isn’t.

To put it simply, the fork will see whatever is on the main Ethereum chain appear as a copy on the forked chain, doubling supply but retaining the same level of collateral, potentially spelling a disastrous bubble for the Ethereum network.

Big players in the industry have also announced their respective allegiances recently, with Binance for instance stating that it will support the forked version, together with Huobi Global exchange who did the same, albeit with several imposed conditions. On the other end of the spectrum, companies like Chainlink, the primary oracle network in the ecosystem, together with OpenSea, the largest marketplace dedicated to non-fungible tokens, have both announced that they will not be supporting the possible fork of Ethereum on their respective platforms.

Ethereum’s proposed solution to this splinter is what is known as the “difficulty bomb”, which once detonated, will make proof-of-work mining of Ethereum nearly impossible and consequently, unprofitable. An unreasonable hash rate, or necessarily expended hash power, will be required to meet the exponentially-increasing difficulty level which is designed to stop miners from mining and producing additional blocks on the chain, hence mitigating the risk of a fork.

Whether or not Ethereum’s “difficulty bomb” will be sufficient to deter the reproduction of a forked chain will most likely be up in the air until the merge eventually descends. Yet technical problems only form one block of consideration on this dilemma chain.

“Coupled with the recent situation of TornadoCash, the merge has caused an ideological storm,” Marcus tells us.

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Referencing the TornadoCash saga which saw the cash mixing service receive heavy sanctions for supposed engagements with malicious organisations and dubious activity, Marcus observes that a number of validators on the Ethereum chain have decided not to validate blocks containing TornadoCash transactions for fear of legal implications with the government.

Truly, one of the primary concerns of the merge, at least from an ideological standpoint, is the consolidation of power through Ethereum’s proof-of-stake consensus mechanism. Within this protocol, validators explicitly stake their Ethereum into a smart contract on the network. This staked ether serves as a collateral that the Ethereum organisation can opt to lock away or even destroy if the validator exhibits malicious or suspicious behaviour.

The overarching concerns of such a protocol however, is that this staking system seems to suggest that the parties with the largest pool of resources at their disposal would invariably have the largest stake, and consequently, power over the network. Naturally, these would tend to be organisations and institutions of scale. The risk of power consolidation towards these already-powerful entities is now more of a concern than ever.

Vitalik however, has responded to these concerns by suggesting that the reality is that consensus mechanisms do not translate to governance over the organisation. “All they do is help the network agree on the right chain,” he says in a recent interview with economics author Noah Smith.

Despite this, it is undeniable that larger crypto organisations have been clearly on the radar of governments in recent times. A new set of rules imposed by the Treasury’s Office of Financial Sanctions Implementation in the UK for instance, have just last week mandated for crypto exchanges to report suspected sanction breaches to the UK, as part of the nation’s political response to Russia’s invasion of Ukraine.

This, coupled with earlier concerns of validators refusing to validate blocks containing TornadoCash transactions, gives rise to the issue of large institutions on Ethereum’s PoS network refusing to validate blocks for fear of facing government scrutiny.

“This centralised control on Ethereum, it has been argued that a coalition of these organisations will fall prey to government capture,” Marcus says gravely. “No one wants to risk dealing with a sanctioned entity. If the US government steps in, then validators will just listen to the government and refuse to validate to err on the side of caution. But this goes against the ethos of decentralisation.”

Indeed, Marcus is right that this risk of political capture is of notable concern moving forward with Ethereum’s merge. Yet there are two significant factors that ought to be considered at the same time when weighing this risk.

First, it is likely that power consolidation is likely to occur either way even if Ethereum continued under a PoW consensus protocol. The most effective mining equipment are oftentimes the most expensive and difficult for the ordinary layperson to procure, let alone sustain their immense energy requirements. According to the Cambridge Center for Altenrative Finance (CCAF), the Bitcoin network alone consumes around 144.63 TWh (terawatt-hours) annually, putting bitcoin’s energy consumption on its own already higher than that of gold. Putting this in context, Bitcoin’s network consumes almost the same amount of electricity as that of a small to medium sized country such as Malaysia or Sweden. This suggests that either way, the majority of mining operations are likely to take place within the gates of large corporations, leading to the same concern of power consolidation.

Next, there has been increased scrutiny on crypto firms and exchanges in recent times regardless of Ethereum’s merge. Singapore has joined UK, together with a significant number of countries around the world in ramping up regulations and sanctions on crypto exchanges and firms in light of recent events such as the collapse of 3 Arrows Capital. This means that either way, there would be a heightened scrutiny on large crypto firms and institutions, resulting in the same risk concern of large companies falling under political capture. Crypto organisations would still be increasingly subject to government scrutiny and regulation, with or without the merge.

Crypto cannot and will not exist within an isolated bubble. It is still subject to government authority to a significant extent, and is also prone to macroeconomic as well as geo-political forces at play.

At the end of the day, it still remains uncertain how Ethereum’s merge will play out, but it does seem to be a zero-sum game of non-mutual exclusivity, at least on the ideological front. Only time will perhaps tell if the fork happens, or if the organisation remains true to the decentralised ethos of cryptocurrency.

Regardless, historical data would go on to suggest that crypto is still at a better place now as compared to 2018. As Stan, Investment Analyst at QCP Capital tells us: “It’s not all doom and gloom, I think there is a silver lining. When markets tumbled this year, crypto’s trading infrastructure held up pretty strongly”.

“The number one priority of the Ethereum foundation right now is to distribute the concentration of Eth staking to as many people as possible,” Marcus concludes. “If you hold on to your faith in the team and in the ecosystem, it will work out. If you study the historical trends, you’ll see that crypto will be successful in the future.”

This is an Op-ed article. The opinions expressed in this article are the author’s own. Readers should take the utmost precaution before making decisions in the crypto market. Coinlive is not responsible or liable for any content, accuracy or quality within the article or for any damage or loss to be caused by and in connection to it.