The central theses
- Ethereum will upgrade to Proof-of-Stake in the next few hours.
- Centralized exchanges, Ethereum dApps, and potential Ethereum proof-of-work forks may end up causing problems for ETH holders.
- Although the merger may prove volatile, it is expected to be beneficial to Ethereum in the long run.
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Ethereum centralized exchanges, dApps, and Proof-of-Work forks may face some issues during the much-anticipated Ethereum Proof-of-Stake merger.
The merger is upon us
Ethereum is preparing for the eventual transition from proof-of-work to proof-of-stake. Corresponding bordel.wtfthe much-anticipated transition, known as a merge in the crypto community, is currently scheduled to take place sometime between 04:45 and 05:36 UTC on September 15th. The upgrade is expected to reduce ETH token issuance by 90% and cut blockchain energy consumption by 99.5%.
At the time of writing, Ethereum athletic a market capitalization of $192 billion and more than $32 billion in collateral locked in its DeFi (Decentralized Finance) protocols. This makes the Merge a particularly high-stakes upgrade. While the crypto community agrees that Ethereum has a high chance of smoothly transitioning to proof-of-stake, it’s worth considering issues that may arise.
Centralized Exchange downtime
Centralized crypto exchanges, even large ones, routinely go down during highly volatile events. In fact, Coinbase and FTX only experienced significant outages this week when the crypto market plummeted afterwards the new CPI print of 8.3%. Should the merger prove to be a volatile event, it would come as no surprise that exchanges are facing technical difficulties.
Besides that, coin base, binanceand FTX have all already indicated that they would prepare for the merger by pausing the transfer of ETH and ERC-20 tokens during the upgrade. It is therefore unlikely that this exchange will be caught unawares by the event; They all also gave assurances in press releases that trading services would not be affected.
dApp malfunctions
According to DappRadar, Ethereum host over 3,460 decentralized applications (dApps) on its blockchain. These include decentralized exchanges, NFT marketplaces, lending protocols, social media platforms, and games. Since the merger will change core elements of Ethereum’s structure, dApp developers will have to adapt their code; For those who don’t, their applications may be disrupted. DeFi protocols can be particularly sensitive, as the algorithms that manage liquidity pools, stablecoin backing, and automated market makers are likely to need updating. Post-upgrade price volatility could cause further drag.
However, the main DeFi protocols appear to have been preparing for the event. Lending platform Aave recently suspended ETH loans to mitigate merger-related liquidity risks. At the same time top decentralized exchange Uniswap specified that it was “anxiously awaiting” the merger and that the services would continue smoothly.
Proof-of-work forks
Ethereum will no longer need miners after moving away from proof-of-work, as the security of the blockchain will be ensured by validators instead. While some Ethereum miners have started migrating to other compatible proof-of-work blockchains (like Ethereum Classic), others have stated their intention to fork Ethereum to keep a miner-friendly version of it running. This would actually result in Ethereum being split into two chains, one with a proof-of-stake consensus mechanism, the other with a proof-of-work mechanism.
In such a scenario would be ETH holders awarded new Ethereum Proof-of-Work (ETHW) tokens in a 1:1 ratio. While this is good news for market participants, the airdrop could come with difficulties. Depending on how competently the Ethereum fork is implemented, users may suffer from replay attacks, meaning a transaction transmitted on one blockchain could be mirrored on the other. For example, a user could accidentally sell 10 ETH when they were just trying to sell 10 ETHW. ETH holders should therefore be careful with their funds immediately after the merger.
Final Thoughts
Finally, it is worth remembering that no matter how volatile the merge, the upgrade is almost certainly a net positive effect for Ethereum in the long run. During the event itself, nothing will be required of ETH holders or NFT collectors: for most users, the transition to Proof-of-Stake will most likely be completely seamless.
Disclaimer: At the time of writing, the author of this article owned BTC, ETH, and several other cryptocurrencies.
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