The second part of the material with arguments against updating the network of the largest altcoin by capitalization
The crypto community is waiting for The Merge event on September 15 — the final transition of the Ethereum blockchain from the PoW (Proof of Work) algorithm to PoS (Proof of Stake). However, many doubt that this will benefit the cryptocurrency. PoS simplifies network scaling, speeds up transactions and makes it energy efficient, but threatens to increase centralization, which is especially unpleasant for DeFi ecosystems on this blockchain. Part of the community opposes the transition and intends to support its PoW forks: the old Ethereum Classic (ETC) and the new Ethereum PoW (ETHW or ETH1). It is on them that most miners will probably transfer their power, since PoS-ether will not need them. What fate awaits the split blockchain? Will at least one of the forks hold the second line of capitalization?
What are critics of Ethereum switching to PoS afraid of?
In the last article, we talked about what concerns the Ethereum (ETH) community has about its transition to the PoS principle (we will conditionally denote the new version of ETH2). First of all, people are afraid of the likely increase in the centralization of the project, and in the future – the fall in capitalization. Today, the most popular decentralized PoS blockchain – Cardano (ADA) – occupies only the 8th line in the capitalization rating. At the same time, the degree of its decentralization is low: 50% of all coins belong to several dozen whales, between which collusion is possible. More popular PoS blockchains like Binance Coin (BNB) are completely centralized, as they are tied to specific issuing companies (for example, to the Binance exchange).
The new ETH2 PoS Ethereum claims to outperform all of these projects by retaining the #2 market capitalization while maintaining high decentralization. In September, according to research by Glassnode, market participants expect the price of ether to rise to $2.2-5 thousand. However, will ETH2 maintain such indicators in the future?
A pessimistic scenario cannot be ruled out: ETH2 “hypanet” only at first, while those who wish will be purchased in the hope of becoming validators (for this, the more coins, the better), but this process will lead to a concentration of capital among a small number of people and a loss of confidence in the project. The new ether will no longer be a serious competitor to BTC and will fall to lower positions with other PoS projects.
Will the place of the main PoW competitor of bitcoin remain empty?
For many years, Ethereum has been ranked second in the capitalization rating. This means that the first two lines, covering most of the market capitalization (today – 59%), are occupied by PoW projects. All these years, ether has acted as a “younger but promising” brother of bitcoin.
If the PoS version of the ETH2 Ethereum retains the second line of capitalization, then an unusual situation will arise for the market: BTC will remain essentially the only popular PoW project. Most of the other first lines will remain with PoS projects, including centralized USDT, BNB, XRP. Considering that a significant part of crypto enthusiasts do not consider them to be full-fledged cryptocurrencies, the crypto market for them will turn into a market for the “only real” bitcoin and projects that “adjoin” it, far removed from Satoshi’s principles.
On the one hand, this situation will strengthen the position of BTC as the main “digital gold”. On the other hand, it is unlikely that the “holy place” of the second PoW blockchain will remain empty. Moreover, the ether has a huge army of miners, most of which, for technical reasons, cannot switch to BTC. Probably most of them will support other projects on the ethash algorithm, among which are PoW forks of Ethereum.
Major PoW Forks of Ethereum
Already, many miners from the “main” ether (ETH) are migrating to Ethereum Classic (ETC). This fork appeared in 2016. Then the cooperation of ETH with the DAO fund led to a major theft of funds by a hacker. Observers have spoken about the insufficient development of the fund’s security system before, but the community relied on “maybe”. As a result, the ether was divided into two new PoW branches: ETH, where the blockchain events were “returned” to the past at the moment before the theft, and ETC, “classic ether”, where the theft was not “cut out of history”. Miner voting over time has shown that ETH is much more popular than ETC. However, now the upcoming ETH abandonment of mining encourages miners to switch to ETC, adding weight to the network and increasing its protection against 51% attacks (which used to happen due to the lack of popularity of the coin).
Another alternative to ETH2 PoS Ethereum could be the latest ETHW PoW fork proposed by Chandler Goh. If we compare two PoW forks, ETC and ETHW, then the second one has the advantage of having all the system improvements from 2016 to 2022 up to the London fork. ETC does not have them.
On the other hand, ETHW, as a “pirated” blockchain, may face hostility from influential supporters of ETH2. Already, for example, the largest Ethereum pool, Ether mine, has announced that it will not support new PoW forks, while ETC support will continue.
So far, in the polls, about half of the community members prefer one fork, and the other half prefer the other. However, after September 15, this parity is unlikely to continue.
The Future of Bitcoin and Ethereum Forks
The future of the market after The Merge remains not very predictable. How much support for miners will raise the popularity of ETC and ETHW? Is the ether development team in danger of splitting? Will PoW forks be able to gather really strong teams? What versions of Ethereum will the DeFi sector prefer? How will Bitcoin show itself, having lost its main PoW competitor?
Probably, until September 15, the capitalization of ETH will grow due to the hope of investors for a short-term increase in the ETH2 rate immediately after the reform, as well as for the possible free receipt of ETHW fork coins. The capitalization of ETH will grow especially noticeably compared to the capitalization of BTC, which we are already seeing (now their ratio is only 38:20%). However, in the medium term, a reverse strengthening of BTC is very likely. Indeed, for some time (until it is not clear which of the forks of the ether will win), it will remain for investors the only recognized “ground under their feet”.
Of the Ethereum PoW forks, only one is likely to win – the one that puts together a more successful team and gives miners a higher profitability. Whether it will be ETC or ETHW, it has a good chance to take a high line in the capitalization rating in any case – as the most popular competitor of bitcoin with support for smart contracts.
As for the PoS version of ETH2, it is around it that high uncertainty can persist for many months. This fork already has a good team led by Vitalik Buterin. At the same time, the support of miners is not important to him. But DeFi developers will still have their say here. Some projects may prefer the speed of PoS, others may prefer the decentralization of PoW. This is what will largely determine the balance of power between PoS and PoW versions of the second market cryptocurrency.
