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Key points to remember

  • Ethereum is moving to proof-of-stake in the next few hours.
  • Centralized exchanges, Ethereum dApps, and potential Ethereum Proof-of-Work forks can end up causing problems for ETH holders.
  • Although the merger may prove volatile, it should be beneficial for Ethereum in the long run.

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Centralized exchanges, dApps, and Ethereum Proof-of-Work forks may face a few hiccups in Ethereum’s highly anticipated Proof-of-Stake merger.

The meltdown is upon us

Ethereum is gearing up to finally transition from proof-of-work to proof-of-stake. According damn.wtfthe highly anticipated transition, known in the crypto community as the merger, is currently expected to occur between 04:45 and 05:36 UTC on September 15. The upgrade is expected to reduce ETH token issuance by 90% and significantly reduce blockchain. 99.5% power consumption.

At the time of writing, Ethereum raised a market cap of $192 billion and more than $32 billion in collateral locked in its decentralized finance (DeFi) protocols. This makes Fusion a particularly important upgrade. While the consensus in the crypto community is that Ethereum has a strong chance of transitioning to proof-of-stake smoothly, it is worth considering the issues that may arise.

Centralized Exchange Downtime

Centralized crypto exchanges, even the largest ones, are regularly interrupted during highly volatile events. In fact, just this week Coinbase and FTX experienced significant outages as the crypto market fell sharply after the new ICC print by 8.3%. If the merger proves to be a volatile event, it would not be surprising if the exchanges experienced technical difficulties.

That being said, Coinbase, Binanceand FTX all have already indicated that they will prepare for the merger by suspending transfers of ETH and ERC-20 tokens during the upgrade. These exchanges therefore have little chance of being blinded by the event; they also all assured in press releases that trading services would not be affected.

dApp malfunctions

According to DappRadar, Ethereum hosts more than 3,460 decentralized applications (dApps) on its blockchain. These include decentralized exchanges, NFT markets, lending protocols, social media platforms, and games. Since the merger will change core elements of Ethereum’s structure, dApp developers need to adjust their code; those who don’t can see their applications suffer interruptions. DeFi protocols can be particularly sensitive, as algorithms managing liquidity pools, stablecoin support, and automated market makers will likely need updating. Price volatility after the upgrade could lead to additional tensions.

However, major DeFi protocols seem to have prepared for the event. Lending platform Aave recently suspended ETH lending to mitigate liquidity risks from the merger. At the same time, the best decentralized exchange Uniswap noted that he was “looking forward” to the merger and that the services would continue to operate smoothly.

Proof of work forks

Ethereum will no longer need miners after dropping proof of work, as blockchain security will instead be provided by validators. While some Ethereum miners have started migrating to other compatible Proof-of-Work blockchains (such as Ethereum Classic), others have declared their intention to fork Ethereum to maintain a miner-friendly version of it. This would in effect cause Ethereum to be split into two chains, one with a Proof-of-Stake consensus mechanism, the other with a Proof-of-Work mechanism.

In such a scenario, ETH holders would be reward new Ethereum Proof-of-Work (ETHW) tokens at a ratio of 1:1. While this is good news for market participants, the airdrop could come with challenges. Depending on how skillfully the Ethereum fork is implemented, users may experience replay attacks, meaning that a transaction broadcast on one blockchain may be mirrored on the other. For example, a user might accidentally sell 10 ETH when they were only trying to sell 10 ETHW. ETH holders should therefore act cautiously with their funds immediately after the merger.

Final Thoughts

Ultimately, it’s worth remembering that no matter how volatile the merger, the upgrade is almost certainly a net benefit to Ethereum in the long run. Nothing is required of ETH holders or NFT collectors during the event itself: for most users, the transition to proof-of-stake will most likely be perfectly seamless.

Disclaimer: At the time of writing this article, the author of this article owned BTC, ETH, and several other cryptocurrencies.

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