The Fork Wars: The Miners Strike Back

A useful visual aid created by Listed Reserve showing the timeline of major ETH forks and the upcoming potential ETHW fork

We are going to use a lot of terminology so going through this article will require some assumed knowledge. To get up to speed prior to reading this article, please review our article on 'The Merge' to ensure a great reading experience.

There is a monumental change about to occur on the Ethereum blockchain as it intends on transitioning away from a Proof-of-Work (PoW) consensus model towards a Proof-of-Stake (PoS) consensus model.
This transition away has been unanimously loved by the Ethereum community except for two small communities, one being without too much influence and that is the PoW advocates and the other being the extremely powerful and financial incentivised mining community. 

Now with 'The Merge' fast approaching, the ETH miners are advocating for a fork where the chain will still exist as PoW consensus, whilst ETH (the one we use today) finalises its move towards PoS.

There are now significant trading opportunities that spring up and we will be emailing all our clients with a detailed breakdown on the different options they have available to them through Stormrake. If you don't have a brokerage account with us yet, you can reach out to us today and we can share the same research with you.  

What the Fork is going on?

Let's first start by understanding what is a fork and in particular what is a hard fork, as this is what is being proposed by the Ethereum mining community in hopes of preserving their business model. Cryptocurrencies like Bitcoin and Ethereum are powered by decentralized, open-source software called a blockchain. A fork happens whenever a community makes a change to the blockchain’s protocol, or basic set of rules.

This can happen whenever a community makes a change to the blockchain’s protocol, or basic set of rules. When this happens, the chain splits — producing a second blockchain that shares all of its history with the original, but is headed off in a new direction.

This is best visualised via the infographic below. 

The risks and opportunities ahead

Navigating cryptocurrency investing at the best of times is a tricky endeavour. When you factor in the current macro conditions and the complexity of the upcoming merge and throw in a hard fork on the second largest cryptocurrency asset by market cap and you have a recipe for casual investors to be left behind.

We understand these risks and assess how to approach them by modelling the probability of outcomes and assigning a value for a series of outcomes to reach a desired risk/reward profile. At this point, we share our research with our clients to give them the confidence to go on and trade these events with institutional grade resources at their disposal.  

For anyone holding Ethereum, we encourage you to reach out and have a conversation with us and we'll help you assess your options and provide you with the same resources to make the decision making process less daunting.

How this can affect your crypto portfolio

The purpose of this post is to not be alarmist, spread uncertainty about the upcoming Ethereum merge, or even to say that you should be looking to trade known volatile events but to highlight the opportunities available. Doing nothing is a perfectly viable strategy and is easiest to use, it's just that not making a decision is also making a decision because it has consequences. We don't very often get such known volatility events well ahead of time, so it's vital to stay informed and have a well thought out discussion with your Stormrake crypto broker.

There are 4 main options heading into this potential ETH fork, all of which has been sent to our clients directly. If you have friends that hold ETH and are unsure what to do, feel free to pass on your brokers details and we would be happy to help.

The battle shall be epic 

Cast your mind back to the 'Great Fork Wars' of 2017 where a heated Bitcoin community was completely divided. The contention was essentially about four somewhat interrelated issues:

1. The level of blockspace available in each Bitcoin block – Essentially, whether the eventual state should consist of surplus capacity available in the blocks, or consistently full blocks.

2. How to modify the rules of the Bitcoin protocol – Whether the rules on the validity of Bitcoin blocks should change relatively easily, or whether they should be more robust and only change in exceptional circumstances, with broad support from all interested parties.

3. The significance of the nodes of ordinary users – The extent to which, if any, validating nodes of the ordinary end users had a say in enforcing Bitcoin’s protocol rules.

4. Time preferences – Whether Bitcoin was like a tech startup which should prioritise gaining market share in the short term; or if it was a long-term project, a new global money, and one should think decades ahead when making decisions.

In short, this battle ended with a hard fork which created Bitcoin Cash (BCH) and Bitcoin (BTC) continued to exist as the Bitcoin we know and love today. We bring this to your attention as BCH is now effectively a dead chain and its network is meagre at best when compared to BTC, this is very real risk that poses any hard forked blockchains and shows the financial risk posed to investors.

There was however an almighty pump by BCH against BTC and due to the nature of how hard forks work, sometimes the holders of the coin that exists on the current chain get airdropped the coin of the new chain. Bitcoin investors who rushed to dump their BCH would have missed out on growing their Bitcoin stack by 3x - 5x by selling their free tokens at a more opportune time.

This scenario is where the decision for crypto investors lies, for even doing nothing is an active choice and it bears risks and rewards.

The BCH/BTC price chart best encapsulates the risks and rewards available for investors

The straight and narrow

You have been hit with the cold hard facts as to what is a fork and the clear risks and opportunities they present but now as an intrepid crypto investor, you must make the decision as to how to navigate these waters. We're not your financial advisors nor will we ever provide financial advice, but we will do our very best to deliver you the facts, no fluff and that way you can make your decisions with confidence. Moneyball style.

No Advice Warning 

The information in this newsletter is general only. It should not be taken as constituting professional advice from the author - Stormrake PTY LTD.

Stormrake is not a financial adviser and does not provide financial product advice. You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your unique circumstances. Stormrake is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by this newsletter.

 

Disclaimer 

All statements made in this newsletter are made in good faith and we believe they are accurate and reliable. Stormrake does not give any warranty as to the accuracy, reliability or completeness of information that is contained here, except insofar as any liability under statute cannot be excluded. Stormrake, its directors, employees and their representatives do not accept any liability for any error or omission in this newsletter or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided in this newsletter is owned by Stormrake. You may not alter or modify this information in any way, including the removal of this copyright notice.

Copyright © 2022 Stormrake Pty Ltd, All rights reserved