The Merge: What could go wrong with the Ethereum merger?

Ethereum’s centralized exchanges, dApps and Proof-of-Work forks could face a few hiccups in Ethereum’s highly anticipated merge to Proof-of-Stake.

Ethereum is preparing to make the final switch from Proof-of-Work to Proof-of-Stake. According to bordel.wtf, the highly anticipated transition, known in the crypto community as “the merge,” is currently scheduled to take place between 06:45 and 07:36 today. The upgrade is expected to reduce ETH token issuance by 90 percent and decrease the blockchain’s power consumption by 99.5 percent.

Ethereum has a market capitalization of $192 billion and over $32 billion worth of collateral locked up in its decentralized finance (DeFi) protocols. This makes the merger a particularly high-stakes upgrade. While the consensus within the crypto community is that Ethereum has a great chance of making a smooth transition to Proof-of-Stake, it is worth considering the problems that could arise.

Stopping the centralized exchange

Centralized crypto exchanges, even the largest ones, regularly go down during highly volatile events. In fact, just this week, Coinbase and FTX experienced major outages when the crypto-currency market fell severely after… the new 8.3% CPI print. If the Merger turns out to be a volatile event, it wouldn’t be surprising if exchanges experience technical difficulties.

That said, Coinbase, Binance and FTX have all already indicated that they will prepare for the Merger by halting ETH and ERC-20 token transfers during the upgrade. It is therefore unlikely that these exchanges will be caught off guard by the event; they have also all assured in press releases that trading services will not be affected.

DApp Malfunctions

According to DappRadar, Ethereum hosts over 3,460 decentralized applications (dApps) on its blockchain. These include decentralized exchanges, NFT marketplaces, lending protocols, social media platforms and games. Because the merger will result in changes to fundamental elements of Ethereum’s structure, developers of decentralized applications need to adapt their code; those who don’t risk having their applications interrupted. DeFi protocols may be particularly sensitive, as the algorithms managing liquidity pools, stablecoin support, and automated market makers will likely need to be updated. Price volatility as a result of the upgrade could cause additional stress.

The major DeFi protocols, however, appear to have prepared for the event. Lending platform Aave recently paused ETH lending to mitigate liquidity risks from the merger. At the same time, the first decentralized exchange Uniswap reported that she was waiting for “with impatience“the merger and that the services would continue to operate without problems.

forker Ethereum

Ethereum will no longer need miners after abandoning the Proof-of-Work method, as the security of the blockchain will be provided by validators. While some Ethereum miners have begun migrating to other Proof-of-Work compatible blockchains (such as Ethereum Classic), others have declared their intention to fork Ethereum to keep a miner-friendly version. This would have the effect of splitting Ethereum into two chains, one with a Proof-of-Stake consensus mechanism, the other with a Proof-of-Work.

In such a scenario, ETH holders would be allocated new Ethereum Proof-of-Work (ETHW) tokens in a 1:1 ratio. While this is good news for market participants, the air drop could come with challenges. Depending on how competently Ethereum’s forking is implemented, users could experience replay attacks, meaning that a transaction released on one blockchain could be replicated on the other. For example, a user could accidentally end up selling 10 ETH when they were only trying to sell 10 ETHW. ETH holders should therefore be careful with their funds in the immediate aftermath of the merger.

Final Thoughts

In the end, it’s worth remembering that, regardless of the volatility of the merger, the upgrade is almost certainly a net positive for 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 transparent.