You’ve probably heard of it, but The Merge update on Ethereum is making a lot of noise right now. This update could also cause great damage if ever a hard fork was happening and it was relayed by big players in the ecosystem and here’s why.
A history of hard fork following a divergence of consensus
A hard fork occurs when there is a breakdown of network consensus within the community. The network is then divided into two branches:
- The first branch adheres to the original rules established by the community.
- The second branch follows the new rules created by the community.
The Ethereum network, for example, is divided between those who want to switch to Proof-of-Stake technology as a consensus method and those who want to continue using the Proof-of-Work system. Before the hard forkthe mining difficulty will gradually increase until nodes in Proof of Stake take over from miners.
At the time of hard fork, the second chain is created at some point (usually a block) and duplicates the assets of the original chain. There is no reset, and blockchain will continue to keep history and all user balances.
This was also the case during the split of the Bitcoin with Bitcoin Cash in 2017 and users had cryptocurrency on either side of the blockchain. Ultimately, the price is set by buyers and sellers via the law of supply and demand.
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Duplicate cryptocurrencies during the Merge
On a blockchain that only has a native coin, we can say that the damage is limited because it only affects one asset. On a blockchain like Ethereum where thousands of cryptocurrencies are deployed, this affects thousands of assets, including NFTs.
The systemic risk is therefore very present because it also induces a multiplication of stablecoins in the ecosystem. Imagine having $10,000 today and $20,000 after the merge, without any manipulation on your part.
The risk of hard forkif supported by big ecosystem players like Binance, is devalue certain assets including stablecoins. In effect, they will have been created out of thin air, the same way banks print money. It will therefore be necessary to be particularly attentive because it is typically the kind of event that will create volatility.