This is part four in a series on Ethereum's Merge. In part one, we explored what the Merge is. In part two, we evaluated the impact that the Merge would have. In part three, we learned how the Merge will work. Here, we will look at what you need to do to prepare for the Merge.
How Should I Prepare For The Merge?
The short answer to this is you don’t need to do anything to prepare for the Merge.
The confusion around this update has unfortunately created an opportunity for scammers to trick people into giving up their ETH. So I want to make this really clear. You will not need to do anything to prepare for the Merge. There is no new version of ETH that you will need to swap your coins for; there are no special wallets or MetaMask updates that you will need to install; you do not need to do a thing.
From a user’s perspective, the Merge will be completely invisible. Everything that exists and works on Ethereum under Proof of Work (PoW) will exist and work in exactly the same way under Proof of Stake (PoS). It will not change anything.
The only people who will need to make changes ahead of the Merge are those running Ethereum nodes, such as block producers. These people will know who they are and will almost certainly have prepared themselves by now — especially as the deadline for some updates has already passed.
So, please, if anyone tries to convince you to do something to "prepare for the Merge", do not do what they say, it's almost certainly a scam.
But I’ve Heard I Can Make Money Off This
OK, we’re getting into some dangerous territory here so I want to make it really clear that I’m not telling you to do anything. I'm not advocating for you to follow a particular strategy or buy a particular asset. All I am doing here is stating my opinion on what might happen.
That said, there's clearly a lot of excitement about the possibility of a miner-led fork of Ethereum at the time of the Merge. If that happens, everyone who owns ETH or any other asset on Ethereum would receive additional, duplicate coins on the new chain. Naturally, a lot of people want to position themselves to take advantage of that.
If you haven't heard about this, the idea is that miners will try to preserve a PoW version of Ethereum after the Merge. To do that, they'll edit Ethereum's code to remove anything relating to PoS and anything else they dislike. By making these changes, they won't be aware of the Merge when it happens, and they won't know that new PoS blocks are being produced. They'll just keep producing new PoW blocks on top of the last pre-Merge block as if nothing had happened.
That means their new blockchain, often called EthPoW, will retain all of Ethereum's history up to that point. So, anything that exists in Ethereum before the Merge will also exist on EthPoW afterwards. If you had 1 ETH and 100 USDC before the Merge, for example, you would own 1 ETH and 100 USDC as well as 1 EthPoW and 100 USDCPoW after the Merge. Sounds good, right? But, it's a bit more complicated than it seems.
Some assets represent off-chain items that won't be duplicated after the Merge. The USDC in our example represents dollars held in a bank account. Those dollars won't magically multiply because a blockchain forked. As a result, the USDCPoW will not represent or be redeemable for anything -- it will be worthless. Similarly, any token representing off-chain assets will be worthless on EthPoW. That includes assets representing staked ETH, such as Lido's StETH, as staked ETH lives on the Beacon Chain rather than the main Ethereum blockchain.
After the fork, these assets will quickly reprice on the new EthPoW chain, and that will spark chaos across the chain's DeFi ecosystem. For example, on-chain lending platforms will be left with masses of bad debt, while exchanges like Uniswap will be drained of liquidity so only worthless assets remain. Some people will make a lot of money from the chaos, but they will be a tiny minority representing the fastest and most knowledgeable users. The vast majority of people trying to play this will almost certainly get wrecked.
Most people have recognised this and have followed an easier path. For example, some people are choosing to buy spot ETH while shorting ETH futures. That means they will receive EthPoW without exposing themselves to ETH's price swings. This method would be profitable as long as the cost of shorting is less than the EthPoW can be sold for.
Others are leveraging up on ETH to maximise their claim on EthPoW. Again, they'd make money if the EthPoW is worth more than the cost of borrowing. But, with so many people trying to make the same trade, the cost of borrowing has increased and I suspect many will end up losing money.
Of course, these people need to borrow ETH from somewhere, and that creates a new opportunity to benefit from the fork. People who lend their ETH will forfeit their forked coins but should receive generous compensation with borrowing rates so high. However, the demand for borrowing also presents a risk. Currently, lending protocols are nearing 100% utilisation, meaning all of the ETH that can be borrowed is being borrowed. When that happens, lenders must wait for ETH to be repaid before they can withdraw. It's also worth noting that some people are being particularly cautious because of the Merge and are withdrawing from lending pools. I don't know exactly what they're expecting to happen -- DeFi protocols shouldn't be affected in any way -- but I understand their desire to play it safe.
Of course, the easiest and least risky approach is to do absolutely nothing. In this case, you'd take no additional risk but still receive EthPoW (assuming your ETH is on Ethereum and not an L2).
Personally, this is the approach I'm taking. In an ideal world I would have lent out more of my ETH, but frankly, I can't be bothered to move everything around to try and profit from this.
I can't help but feel the whole EthPoW fork is being blown out of proportion.
Futures markets show it will be worth just a few per cent of ETH, and I expect that to drop significantly in the days and weeks after launch. There may well be some crazy price action immediately after launch because of on-chain chaos, but that shouldn't last long.
At the end of the day, there's no obvious need for this new chain and no audience that seems likely to use it or buy the coin. Why would it have any long-term value? I suppose similar arguments could be made against other prominent forks like Ethereum Classic and Bitcoin Cash, both of which have perplexingly high market caps to this day. But, at least those forks also had large, pre-established audiences that were ideologically aligned with them. EthPow appears to be exclusively backed by otherwise redundant miners and speculators looking to make a quick buck. Both of those groups will be looking to sell.
What's more, I'm not sure if the EthPoW chain will even launch. I haven't followed things too closely, but everything I've seen suggests that EthPoW is a slapdash effort. I don't know if it will be complete before the Merge, or if it will even work once it is complete. There's every chance that speculators have tripped over themselves chasing an opportunity that will never exist.
Of course, I could be totally wrong on that. Maybe EthPoW will launch, and maybe it will be a massive success that proves doubters like me wrong. I'm just saying things as I see them. And, that's why you shouldn't take anything I say as actionable advice.
The only advice I am willing to give is that you should make sure you absolutely know what you're doing before trying to make any financial play around the Merge or EthPoW fork. If the chain does launch, you might want to check multiple reputable sources to confirm it's safe before you try anything. At times like these, when there's so much risk and uncertainty, it's probably best to slow down and think carefully about anything you do. Don't let anyone pressure you into making a decision that involves your funds. The pain of missing out on some gains will be much less than the pain of losing everything to a scam or silly mistake.
Whatever you choose to do or not do around the Merge and EthPoW fork, I hope you have fun.
The Merge will go down as a massive technical achievement and a landmark moment in Ethereum's history -- one that has been many years in the making. It's going to be very exciting to finally see it happen.
If EthPoW happens, it will be fascinating and exciting for entirely different reasons. The on-chain calamity that follows will likely make Luna's collapse look tame, and it will teach us a lot about how to build better and more resilient on-chain apps. The next few days should be very interesting indeed.