Why Ethereum PoW Could Be Doomed to Fail

The proposed Ethereum fork will provide nothing but carbon emissions and an exit strategy for mining syndicates.

By James Edwards

Ethereum (ETH) is about to undergo its biggest transformation ever, the Merge. This will see the network migrate from an old-school proof-of-work (PoW) blockchain to a modern proof-of-stake (PoS) system.

Proof-of-stake eliminates the need for mining rigs, which are energy-hungry computers used to process transactions and keep the network secure. 

When critics of cryptocurrency need something to fall back on, it's almost always the climate impact of mining. The numbers aren't clear, but estimates put the annual emissions of Ethereum on par with nations like Switzerland and Sweden.   

By eliminating this, Ethereum clears yet another hurdle for widespread adoption of blockchain technology, especially by climate-conscious governments, organizations and investment bodies that have increasingly high ESG requirements.

Unfortunately, the mining industry isn't going down without a fight.

ETHPoW – A blatant cash grab

A group of Ethereum miners want to fork the Ethereum blockchain, creating a new version called ETHPoW (ETHW) that is still dependent on mining.

This involves copying the Ethereum blockchain and all of its data, but tweaking the rules to allow miners to continue to operate. Existing Ethereum users would retain their tokens on the new chain, while receiving a new coin called ETHW in place of ETH. Essentially creating free money out of nowhere.

ETHPoW is led by Chandler Guo, a prominent cryptocurrency miner who was involved in the creation of Ethereum Classic (ETC), Ethereum's most high-profile fork that was created back in 2016. Ethereum Classic has been attacked on multiple occasions, and now has a market cap of just 4% of Ethereum's.

Not one to forget history, Guo admits there is a "90% chance" the ETHPoW fork won't succeed. But given the size of Ethereum's mining industry and the cost already sunk into mining rigs, he says the fork is "inevitable", as it is the difference between bankruptcy and success for many of the mining outfits in his consortium. 

It is clear then that ETHPoW doesn't exist to meet some sort of technological, social or economical goal as many blockchains do, but instead, it is a last-ditch exit strategy for an industry that has had well over 5 years to prepare.

Why it can't work

A fork involves duplicating all of the existing account balances, tokens, NFTs and smart contracts. This means all the cryptocurrencies that existed on Ethereum, will now exist on this new chain as well.

But all this is useless without the support of the community. 

When a chain forks, the community decides on which is the "real" chain, and whether there is any value at all in the new chain. If ETHPoW is to succeed in any capacity, it needs buy-in from more than just miners – it needs widespread support from everyday users, app developers and businesses. Without them, every token becomes worthless, like a cheap photocopy of the Mona Lisa. 

But this is unlikely to happen, mainly due to Ethereum's advanced ecosystem which includes thousands of interdependent tokens, DeFi markets, NFTs and stablecoins. The latter of which correspond to real-world dollars in the bank. Not exactly something you can conjure out of thin air (unless you're the US Federal Reserve).

Leading stablecoin issuer, Tether, has preempted this issue and CTO Paulo Ardoino stated that Tether will only be supporting the post-Merge Ethereum. 

Tether's USDT is responsible for tens of billions of dollars of value on Ethereum – without its support, it's difficult to see how any fork could work.

Ardoino said that the complications of DeFi and stablecoins made the decision clear.

"It's not about what I/we prefer between PoW/PoS. Stablecoins should act responsibly and avoid disruption for users. Especially for DeFi, it's really delicate."

Aave – the largest DeFi lending market on Ethereum – has also weighed in, with Integrations Lead, Marc Zeller getting straight to the point.

"You can't have a fiat-backed stablecoin doubling the supply overnight and keeping 1$ value." 

Zeller went on to explain stablecoins would effectively prevent any fork from succeeding, and that the only way it could possibly work is through new issuance – which arguably defeats the point of a fork in the first place. As Zeller puts it, "DeFiPoW is dead on arrival."

The maturity and complexity of Ethereum has effectively made it fork-resistant. Much like our globalized economy, individual applications and assets are now so dependent on one another that any rogue chain would quickly become worthless, much like the economy of a pariah state cut out of global trade and sanctioned into oblivion.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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