The Merge - Strategy & Caveats

Mid-September, Ethereum is expected to transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS). There is a high chance that this will lead to a chain split, where we’ll see the community-accepted PoS chain and a miner-lead fork to keep the PoW chain alive as well.

Any asset - native ETH, ERC20 tokens, smart contracts and NFTS - will exist on both the PoS chain and the PoW chain.

In the event that the PoW chain retains any value, we should look to maximize our potential outcome.

At the moment of writing, this is expected to occur on September 15th.

Below are our thoughts and identified opportunities for this event. Note that our conclusions reflect our current plan of action and may change with new information that comes out, ahead of The Merge.

Caveat 1: replay protection

As it stands now, there does not seem to be a plan (yet) to implement replay protection for the PoW chain. This is dangerous and will require extra precautions from your end.

A replay attack could take a valid transaction made on the PoW chain and broadcast it to the PoS chain as well, causing the exact same actions on the PoS chain (provided all pre-conditions of the transactions are still met).

A token transfer we do on the PoW chain can, without it being intended, also be executed on the PoS chain.

Solutions:

1. No actions are needed if replay protection is correctly implemented in the PoW chain.

2. If not, we should - after the merge - take precautions to prevent replay attacks. The exact solution will depend on what action we want to perform (send native ETH, pull liquidity, transfer NFTs, etc)

Notes:

• Thread: ETHPoW Hard Fork Risks

• Reddit: The risks of interacting with ETH PoW

• Thread: Replay Attack protection mechanisms post-merge

Caveat 2: support for the PoS chain

Everyone has the right to choose to support either the PoS chain or the PoW chain. All actions in this document can be inversed, if someone chooses to remain on the PoW chain, the opportunities can be performed on the PoS chain instead.

It should be noted that the Ethereum community favours the PoS chain at this point, and it has a higher chance of success than the PoW chain.

That said, there are risks - especially with OFAC sanctions being more difficult to ignore on the PoS chain - that there remains a particular community in support of PoW.

Opportunity: native ETH

Any on-chain ETH held at the moment of the merge will also exist on the PoW chain.

Current futures markets value ETH PoW at roughly $40-$50 per token (according to Bitmex & Poloniex). This comes down to around 3% of the current price of ETH.

Potential preparations

1. Ensure ETH is held in a single-signature hardware wallet. ETH in a Gnosis Safe (multisig) would be harder to access since there likely will be no UI yet from Gnosis Safe to access the vault on PoW.
   
   Unless Gnosis confirms support for the PoW chain, it would be more practical to have ETH in a single-signature wallet. Note that this brings risks as well.

2. Ensure ETH is held off-exchange, as it’s unclear which exchanges will support the merge. On-chain ETH will fork to PoW, on-exchange ETH doesn’t have that certainty.

3. Create KYCd accounts on the most likely CEXs to support the ETH PoW chain.
   
   Note that we will only be able to sell the ETH PoW on CEXs, as there won’t be any valuable USDT/USDC on the PoW chain to sell into, this rules out any Uniswap DEX trades - it has to be on CEXs.
   
   In the unlikely event there will be valuable DEX pools on the PoW chain, sales can also be made on the PoW chain directly.

Circle, the issuer of USDC, already confirmed they will only honour redemptions of USDC on the PoS chain, rendering all USDC on the PoW chain worthless. The same is to be expected for USDT or WBTC.

Opportunity: LP tokens & DEX pools

DEX pools will also be forked over to ETH PoW. Those DEX pools hold the base token + quote, likely ETH or USDT/USDC.

The ETH in those pools could be valuable. We can either pull all liquidity on the PoW chain, to secure the ETH out of the pool. Or we can sell ERC20 tokens into those pools on the PoW chain, to extract the ETH.

Any USDT/USDC held on the PoW chain is worthless, so should be traded for ETH PoW asap. This could lead to an increase in liquid ETH PoW, as everyone attempts to get the most out of their (worthless) ERC20 tokens, selling those for the native token. This will increase the total sell pressure on ETH PoW as those tokens hit exchanges.

(Note: only in the case where we can prevent replay attacks on the PoS chain, for obvious reasons. It is highly undesirable to have market-impacting trades be copied over to the PoS chain.)

Potential preparations

1. Move valuable LP or ERC20 tokens over to a single-sig, hardware wallet (provided Gnosis Safe doesn't support the PoS chain right after the merge).

2. Pre-approve the LP tokens on the Uniswap router contract (approvals will fork over as well).

3. Prepare scripts to create & broadcast LP removal or DEX trades directly to a viable RPC endpoint for the ETH PoW chain.

Opportunity: NFTs & market places

This might be technically more complex to pull off: if there are on-chain bids for BAYC or other valuable NFTs, those bids also fork over. If we offer a BAYC/MAYC for sale on Open Sea, and bids come in, those bids should also be acceptable on the PoW chain.

We then submit an on-chain transaction on the (worthless) PoW chain to accept those bids, as a result, we sell a worthless BAYC/MAYC (on the PoW chain) and can receive the ETH tokens from the buyer.

Animoca/Yuga Labs has already confirmed to only support BAYC IP on the PoS chain, any PoW NFTs are worthless and could be sold.

Again, on the premise that either replay protection is built-in or we can safely prevent replay attacks.

Notes on timing

Looking back at the BTC / BCH fork, the timing of selling ETH PoW generally boils down to:

• Try to be among the first to sell (ie: within a day), could be challenging to pull off

• Wait a month or so, for miners to regain control of the chain, with a chance of them artificially increasing the price.

When checking the BCH/BTC price, there was a clear rise after the initial month, leading to a +220% price increase.

Similar patterns can be found for other airdrops, like UNI & OP.

Notes on deposits/withdrawals during The Merge

It is assumed almost every exchange will disable deposits to ETH a day or so in advance and may have withdrawals blocked for several days afterwards - until things quiet down. This can take longer if exchanges have to implement Replay Protection themselves.

This will include blocking deposits/withdrawals for all ERC20 tokens in this period as well. There will likely be bigger arbitrage opportunities during this period.

Our conclusion

While there are many opportunities with The Merge coming up, the current future pricing of ETH PoW only values the token at around 3% of the current ETH price. This is similar to how ETC is valued against ETH now.

Many of the potential strategies involve a high degree of risk, either by (temporarily) sacrificing security best-practices to be in the best position to access PoW ETH after The Merge or by invoking dangerous actions on the PoW chain that must not be replayed on the PoS chain.

As it stands, we intend to not prepare dangerous actions like moving secure ETH out of multisig. As always, security & stability are our primary focus. At a 3% token price, this risk is not worth the potential reward.

If the ETH PoW chain survives after a few months, we'll likely see an increase in activity and token price, and by then the ecosystem will be mature enough to access multi-sig ETH as well, giving us a safer opportunity to sell ETH PoW.