Ethereum PoW Is Not an Ethereum Competitor

Will proof-of-work blockchains benefit from the Merge, beyond short-term speculation?

AccessTimeIconSep 15, 2022 at 6:24 p.m. UTC
Updated May 11, 2023 at 4:36 p.m. UTC
AccessTimeIconSep 15, 2022 at 6:24 p.m. UTCUpdated May 11, 2023 at 4:36 p.m. UTCLayer 2
AccessTimeIconSep 15, 2022 at 6:24 p.m. UTCUpdated May 11, 2023 at 4:36 p.m. UTCLayer 2

Ethereum, the world’s most active cryptocurrency network, just fired all of its miners. In a much-anticipated event you may have heard of called the Merge, Ethereum devs “switched out the engine of a moving car” to do away with the energy intensive process of securing blockchains known as proof-of-work (PoW).

That means scores of specially designed graphics chips, called ASICs (or application-specific integrated circuits), need to be pointed elsewhere if their owners – individuals, institutions and mining pools – want to churn a profit. There are only a few blockchains that use a similar-enough hashing function to Ethereum that could benefit from the estimated $5 billion worth of EtHash ASIC hardware in existence.

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Already it seems that Ethereum Classic, a version of Ethereum that split from the “canonical chain” in 2016, has been a big winner. Ethereum Classic has seen its network hash power jump about 300% last night to closer to 300 terra hashes per second (TH/s) today, according to data site 2miners. (Hash power is the amount of computational energy used to secure a PoW crypto network.)

Other, smaller, mostly inconsequential, chains like Ravencoin and Ergo have also seen massive spikes in hash power and the price of their native tokens. It remains to be seen whether this is a sustainable rally, considering the limited number of things you can do with – or reasons to build around – RVN and ERG.

Nowhere is the balancing act between the market price for a crypto token and the amount of energy people are willing to expend to earn those tokens clearer than in the alternative proof-of-work Ethereum fork aptly named ETHPOW.

The latest, buzziest Ethereum fork – “designed” by veteran Ethereum miner, initial coin offering (ICO) pitchman and principal architect of Ethereum Classic, Chandler Guo – was set up to benefit from the Ethereum Merge. Through promises of an airdrop (free money for ether holders) and charisma, Guo managed to convince at least 19 former Ethereum mining pools to continue mining his new chain.

Its token, ETHW, rallied from $35 to $60 in the hours following the network’s launch shortly after the Merge, before dropping to around $20 currently. This likely isn’t surprising to the number of people who predicted ETHPOW would come dead on arrival.

Although there could actually be a post-Merge market fit for a smart contract blockchain that utilizes mining (considering the top fleet of such chains from Solana to Cardano all use a variation of PoS), many have said ETHPoW is more of a cash grab. Despite seemingly large trading interest (or at least interest in the airdrop), few exchanges jumped to list the coin. Tether said it would integrate the chain and many a crypteratto warned it would “fracture” the Ethereum community.

CoinDesk Special Coverage: The Ethereum Merge

Critics noted ETHPoW failed to build basic blockchain infrastructure like a wallet or a block explorer before launch. Igor Artamonov, a former Ethereum Classic developer, questioned the chain’s branding, which seemed to sell itself on the idea of saving those poor, recently chainless miners, rather than something collectively important like proof-of-work’s tried and true security guarantees.

But the real reason the network will likely struggle to take off is that much of Ethereum’s insanely valuable decentralized finance (DeFi) economy may not follow the fork. That is, seemingly, both by choice and in some cases necessity for many DeFi protocols due to broken oracles.

Although many of Ethereum’s loudest boosters seemed to be championing the demise of ETH PoW before it even started – because the alternative chain could suck capital and developer talent from the Ethereum Foundation-approved network – it was probably never accurate to say Ethereum PoW was a competitor of Ethereum.

What it is, instead, is a competitor to Ethereum Classic, which forked in 2016. It’s a competitor for hashpower, for hardware. Its token, which is listed on a few exchanges including Poloniex and (with futures trading on Binance and FTX), is a competitor for attention and dollars.

Ethereum Classic itself was never much of a contender for Ethereum’s throne. The network was hit with 51% attacks multiple times in the previous years, because the network struggled to pay for its own security because its token’s price was in the doldrums because few people (besides CoinDesk owner Barry Silbert) supported the network.

Post-Merge Ethereum Classic now has an overabundance of network miners. But it’s still unclear whether the token price can rise high enough for all of those ASICs to be profitable. Before the Merge, it was estimated Ethereum’s hashing power was 15 times higher than Ethereum Classic. That’s a lot of computing power to absorb, even if split between ETH PoW and the other PoW beneficiaries.

Proof-of-work networks need valuable tokens to make it worthwhile to mine, but it also needs developers and users. We might finally learn the answer to crypto’s perennial chicken-and-egg-like problem: what comes first, a valuable token or valued users?

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Daniel Kuhn

Daniel Kuhn is a deputy managing editor for Consensus Magazine. He owns minor amounts of BTC and ETH.