The Ethereum Merge
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The Blockchain Sector provides information relating to emerging financial technologies. It should not be considered financial advice. Disclaimer below.
The Merge | What Could Go Wrong
The merge is currently due to take place on the 13th September although this date will likely change as it is dependent on miner participation and network hash rates. You can get an updated estimate at: https://wenmerge.com
The migration to a proof of stake network will be great for Ethereum over the long term, in my opinion. It’s more energy efficient, easier to update, scales more efficiently and the economics for ETH will be ground breaking.
There is however some risk of short term issues during the event. The biggest threat I see is the opportunity for a denial of service attack. Trading volumes will be exceptionally high, some will be hedged, some will be short, some will have built a long position going into the merge. There’s an opportunity for a bad actor to take a large short position and then try to cause network issues during or shortly after the event.
While this would unlikely cause a permanent issue it could cause a market wide sell off and profit opportunity for the shorters.
I was lucky enough to hear Ethereum researcher Justin Drake talk at an EthAnglia event a few months back and he spoke of the dangers of proposer DoS.
I’ve also shared concerns around the potential for centralisation around the MEV-Boost relay. Centralisation leads to single points of failure which is bad for network health.
Will something happen? Hopefully not. Ideally we want to see Panda memes 🐼 and be celebrating a successful, seamless merge. Is it guaranteed. Certainly not.
I’ll be watching block explorers and analytics platforms carefully looking for delays in block times, block transaction counts and block reorgs as this will be the first sign that there is an issue.
Block reorgs occur when consensus isn’t agreed upon across the chain resulting in two forked chains. Eventually one is finalised through an attestation algorithm and the other is dropped.
If all goes smoothly and these concerns are unwarranted there is potential for significant upside as anyone who has placed a short term hedge scrambles for liquidity and shorts get destroyed. Some potential for a “sell the news” decline but think that is unlikely given the market dynamics.
Markets: Bitcoin Dominance Retesting 40% Level
BTC.D is currently retesting the 40% level for the 4th time. This is one of the most important charts in crypto for reasons I’ve never really fathomed other than it always has been.
Breaking this level could see a sharp decline to lows never seen before. This is inline with my long term fundamental assessment that Bitcoin will become the gold standard for decentralization but lack of utility through an application layer for 3rd party developers will see BTC.D continue to fall over a long enough period.
Any kind of narrative change for Bitcoin could see a recovery as it continues to redefine itself. I struggle to believe it can continue to be so closely correlated to stock markets forever.
What fills the gap in BTC.D and sees outperforming growth in the blockchain sector is what I intend to explore in future newsletters.
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Disclaimer: Not a financial advisor, not financial advice. The content I create is to document my journey and for educational and entertainment purposes only. It is not under any circumstances investment advice. I am not an investment or trading professional and am learning myself while still making plenty of mistakes along the way. Any code published is experimental and not production ready to be used for financial transactions. Do your own research and do not play with funds you do not want to lose.