BitMEX Research: Hard Fork Leaves PoW Ethereum as Established Chain, Main Chain to be Decided by USDC?

As Ethereum's The Merge approaches, the call for Ethereum to undergo a hard fork to continue the PoW version "ETHPoW" is growing. Poloniex has announced the launch of fork coins futures on 8/8. According to the BitMEX research team, although ETHPoW faces many technical challenges, there is a significant potential for speculative trading in the short to medium term.

The following content is compiled from BitMEX Research, with the text sorted and condensed. For more details and discussions, please refer to the link.

Ethereum Merger Concerns

1. No Exact Timeline

Although Ethereum developer Tim Beiko tentatively set the potential merger date for 9/19 during a phone conference, the exact time parameters for the merger have not been released, leaving uncertainty around the timeline.

In addition, BitMEX Research mentioned that after the merger, stakers won't be able to immediately withdraw their staked ETH to the execution layer client, as this will require a "second merge," which could take another 6-12 months post the initial merge.

2. Miners' Dilemma

Some miners are against the merger, having already accepted EIP-1559, but this merger could potentially reduce Ethereum miners' income to zero. Vitalik suggested that miners could switch to Ethereum Classic (ETC) instead.

However, BitMEX pointed out that prominent Chinese miner Chandler Guo may choose to stay on the Ethereum PoW chain to continue mining, leading the way for PoW chains to continue producing blocks and developing post-merger, although the economic implications remain uncertain.

There are predictions that the tokens on the Ethereum PoW chain could be named ETHPoW, and BitMEX compared the situation to the Ethereum fork into ETH and ETC, suggesting that ETHPoW could still generate market interest.

Ethereum Ice Age

BitMEX noted that Vitalik had foreseen potential chain splits on the mainnet after Ethereum transitions to PoS, proposing a solution named Ice Age, which was deployed in a major upgrade post the Frontier development stage.

During the Ice Age, with the deployment of the difficulty bomb, PoW mining difficulty exponentially increases over time and block height. The latest difficulty bomb has been delayed by developers to mid-September, focusing thereafter on the transition to PoS through the merger. Ethereum has undergone several hard forks over the years in response to this:

Issues Facing ETHPoW

As mining difficulty continues to rise, sustaining ETHPoW will require further hard forks to remove the difficulty bomb. Additionally, to maintain ETHPoW, several challenges need to be addressed:

1. ETHPoW Cannot Claim to be the Original Mainnet as ETC Did, as it requires a hard fork to remove the difficulty bomb.

2. Deployment of New Clients

The new community of ETHPoW must seek a large number of developers to reach consensus on new clients and parameters, and coordinate with exchanges and custodians to run and support the new clients.

3. Determining the Stablecoin as the Mainnet?

BitMEX mentioned a speculation that in the event of another controversial fork on Ethereum, the determining authority would no longer be the Ethereum Foundation or Vitalik, but the stablecoin issuer. The issuer would decide to support one of the mainnets based on the crypto community's acceptance, relevance to DeFi, etc., suggesting that perhaps the final decision-maker could be Jeremy Allaire, the issuer of USDC.

Currently, whether it's Circle, Tether, Binance, or other stablecoin custodians, they all seem to support ETH2. If ETHPoW ultimately fails to gain stablecoin support, it will be a complete loser, and many DeFi projects relying on stablecoins will face catastrophic economic collapse.

4. Ethereum Enthusiasts' Dumping Strategy?

BitMEX speculated that many Ethereum enthusiasts might paradoxically hope for ETHPoW to continue for a while, as they hold a significant amount of ETH and would receive a large amount of ETHPoW tokens after a successful fork.

During the initial launch of ETHPoW, Ethereum enthusiasts could sell off ETHPoW tokens in large quantities to buy more ETH, profiting from what they perceive as "foolish" supporters of ETHPoW.

Merger Arbitrage Strategies - Not Investment Advice

BitMEX provided two ETHPoW arbitrage strategies.

One, Swapping Shitcoins for ETHPoW

Assuming a successful ETHPoW fork, the USDC, USDT, and BNB held on the ETH mainnet at the time of the fork will have equivalent mapping assets on the ETHPoW chain, but they will significantly depreciate:

• USDC on ETHPoW: Worthless, as Circle will choose the ETH mainnet, and the ETHPoW version of USDC will be unredeemable.
• USDT on ETHPoW: Similar situation as USDC.
• WBTC on ETHPoW: Custodians will choose the ETH mainnet, and WBTC will not be redeemable for actual Bitcoin.
• BNB on ETHPoW: Binance will choose the ETH mainnet.
• stETH on ETHPoW: The real stETH issued on the mainnet by Lido will be exchangeable for ETH, while ETHPoW will not have a staking mechanism.
• ERC20 tokens on ETHPoW: The value of all remaining ERC20 tokens will significantly depreciate, such as Uniswap's UNI.

Strategy: Exchange all mapped shitcoins for ETHPoW and sell ETHPoW once supported by centralized exchanges (CEXs), akin to free ETHPoW call options.

Two, "Risk-Free" Trading Approach?

1. Prior to the merger, convert a large amount of USDC.
2. Post-merger, swap the ETHPoW version of USDC for ETHPoW tokens via UniSwap, Curve.
3. When CEXs support ETHPoW trading, cash out all ETHPoW tokens.

Potential concerns:

• The liquidity pool for ETHPoW may deplete rapidly.
• Many DeFi projects rely on oracle prices, with uncertainty on how ETHPoW's side will handle this.
• Any decentralized infrastructure may only support ETH, requiring ETHPoW users to interact with DEX smart contracts initially.

High Speculative Potential for ETHPoW

BitMEX concluded that while ETHPoW still faces numerous technical challenges, if this chain survives, there could be significant speculative trading surrounding ETHPoW, with major exchanges possibly listing its token, predicting that ETH/ETHPoW could become a mainstream trading pair.