8th September 2022 > > ETH hard fork.

tl;dr

Support for a hard fork of ETH continues to grow.

Market Snap

Market Wrap

Perpetual futures funding rates appear to be perpetually skewed to the short side. That cannot last forever. Rates volatility remains high, but this is not necessarily a bad thing. The negative correlation between risk assets and bonds is starting to reassert itself, implying that markets are beginning to believe that the risk of government sponsored market manipulation is beginning to finally recede.

Curious Cryptos’ Commentary – The upcoming ETH hard fork

I make no apologies for the ongoing focus in the CCC about The Merge.

It is simply one of the biggest events ever in the crypto world, and I think we should be on top of it. If we can’t all give a reasonable explanation of the event, and its various implications, then perhaps we should all go back to having a normal life.

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Further pressure is growing in support of a potential hard fork of ETH following The Merge. But it comes from an unlikely source, a source that some crypto enthusiasts might be disappointed with.

As a quick recap, as ETH transitions from Proof-of-Work (PoW) consensus mechanism to Proof-of-Stake (PoS) consensus mechanism, some miners, and some centralised exchanges have publicly announced support for a hard fork of the ETH blockchain, one that continues using PoW.

Rather uncreatively, this potential new blockchain has been dubbed ETHPoW, at least for now.

Holders of ETH at the point of hard fork will own equal amounts of ETH and ETHPoW, as the history of the two blockchains will be identical up until that point.

For reference, ETH is trading at $1,640, ETHPoW at $44, ETHPoS at $1,590, suggesting no executable arbitrage opportunities, except at the very margins, with very high operational risk.

But back to the story.

ETC Group is a TradFi investment firm that provides exchange traded products (ETPs) across several financial assets, one of which is ETH with ticker ZETH. Launched way back on 9th March 2021, ETH was trading at £1,330. At the time Wall Street was trading at 32,000, giving ETH a relative outperformance of nearly +9% vs stocks in the last 18 months.

ETC Group has announced the launch of a new ETH ETP, with ticker ZETW, which will be issued on a 1:1 basis to holders of ZETH at zero cost, to reflect the economics of the ETH hard fork, if it goes ahead.

And this is the interesting point.

For reasons discussed below, crypto maximalists are most likely to align themselves philosophically with supporters of the hard fork of ETH.

For obvious reasons, crypto maximalists are most unlikely to be supporters of TradFi.

But interventions like this from TradFi, not only add to the support for a hard fork, but undoubtedly dramatically improve the probability of its longevity.

Crypto maximalists will be upset about that, but that is a reflection upon the inadvisability of taking an extremist stance on any topic.

Curious Cryptos’ Commentary – The Blockchain Trilemma

The Project Management Trilemma was summed up as:

“You can have it good, fast, or cheap. Pick any two”.

The Blockchain Trilemma says that there has to be a sacrifice made between decentralisation, security, or scalability.

BTC as first envisioned by Satoshi Nakamoto, was all about decentralisation and security. Scalability at just 7 TPS (transactions per second) was not his or her priority. Security is an inherent feature of a distributed ledger, but decentralisation comes about organically as the network of nodes grows.

Decentralisation is achieved incrementally, as the possibility of a 51% attack diminishes. There is little doubt that BTC is about as decentralised as one could hope for.

There is a strong body of opinion that decentralisation can only be achieved using PoW. This line of thinking claims that PoS, and all other consensus mechanisms, sacrifice decentralisation in the pursuit of scalability.

When you look at blockchains such as Solana (SOL) with up to 400,000 TPS, there is no doubt that this network, amongst others, has solved the scalability problem. But crypto maximalists are inclined to ask – at what price for decentralisation?