Ethereum's merge: The giant elephant in the room
Mainstream media is hyped about the Ethereum merge from Proof of Work to Proof of Stake. As they usually do, they ignore a lot of dangers. I recapped what the issues are.
You might have heard about the upcoming Ethereum merge from Proof of Work to Proof of Stake. For a while now Ethereum's main cheerleader, Vitalik Buterin, has been urging the community to upgrade to Proof of Stake. He cheered too hard, as you can see in this image:
The main argument was to scale Ethereum to the max. Buterin often speaks about it being the world’s computer. Next to scaling the other argument was how this change would be more eco-friendly, as you wouldn’t need the evil PoW consensus anymore. A consensus model which has been running for almost 10 years without any interruption and which has proven time in and again how it converts unused energy into something tangible.
Anyways, the main message of the merge would be more aligned with general mainstream narratives. Change something small in our system to save the planet, while ignoring all risks for the next 10 years.
For the unknown retail investor, ETH looks like a safe bet. It has been up 60% since June 2022 and has a giant ecosystem around it. From NFTs to the whole DeFi sector and a 65% majority of all major stablecoins. USDT, USDC, and DAI have huge market dominance in the ERC-20 network, however, L2 solutions are catching up quickly. At a first glance, there is only an upside to ETH and no red flags.
As you might have guessed, that is not true. There are many issues people should be aware of. The first and main issue to me is the centralization aspect of the Ethereum foundation. Unlike Bitcoin, Ethereum has a central institution. If you go to their website and read their ‘About Us’ section, you would find the following statement:
The Ethereum Foundation (EF) is a non-profit organization dedicated to supporting Ethereum and related technologies.
The EF is not a company, or even a traditional non-profit. We do not control Ethereum, nor are we the only organization that funds critical development of Ethereum-related technologies. We are part of a large ecosystem of organizations, individuals, and companies that support Ethereum.
Our mission is to do what is best for Ethereum’s long-term success. Our role is to allocate resources to critical projects, to be a valued voice within the Ethereum ecosystem, and to advocate for Ethereum to the outside world.
In short, the Ethereum foundation is there to oversee the development and growth of the ecosystem, without influencing or disrupting its development. There was always some speculation, that this happened with ETH, you would even find clips of Buterin, where he said how they sold 70’000 ETH at the top. But this clip is the only proof or mention of this happening.
Most of us Bitcoin maxis were always arguing, how the Ethereum foundation was a problem for the whole infrastructure. You can’t say you’re decentralized but have a central instance for everything.
Pure peer-to-peer would allow the user to not interact with any instance and even run their own node. This is technically possible with ETH however you often rely on web services like AWS or Hetzner. The latter has just announced that they will be blocking users who mine or run nodes. Hetzner has a 10% network share and could therefore pose a problem in the near future. Another point for the whole decentralized vs. central debate. Imagine if AWS does the same. Ethereum would be in big trouble…
These statements are more profound, but not incredibly dangerous. If you want to scale something you have to give up some security and usability. Which is an argument many Ethereum maxis tell you. The most dangerous aspect for me is how the Ethereum foundation is pushing the change and not discussing two major drawbacks.
The first one of these drawbacks is the lock-up period for any staked ETH 2.0 tokens. They lock up your investment for 360 days. Most projects set this period between 7 and 28 days. The fact that ETH 2.0 will be out there, supposed to be much better than what we have currently, and still lock their users into the system for 360 days is crazy. Even if this seems crazy there are still people out there who tell you, that they are willing to do this, if that means they get a better yield for their ETH.
As you might have guessed, I’ll now come to the point in this article, which I see as the most compelling argument against the merge. I explained above, how there were always rumors about how the Ethereum foundation has sold their tokens at the top and how they manipulate the market this way. That can only be done by having a central instance with significant power over the whole network.
In the weeks leading up to the merge, the core developer team has been publishing videos on their YouTube channel. In one of them, you hear one developer explaining, how they still need to change major elements in the structure. Don’t believe me? Watch the whole video for yourself.
At first glance, you might think this is necessary. The devil, however, lies in the details. If you listen carefully, you’ll hear how they obtain control over the network with a major share. One developer even says this is necessary to ensure a smooth transition. This is mind-boggling to me! Wasn’t the entire ecosystem build around no central institutions?! Even if that majority is there to ensure a smooth transition, who says the foundation will give that majority back to the community?
This is a recurring theme with Ethereum. If you read Laura Shin’s book - The Cryptopians: Idealism, Greed, Lies, and the Making of the First Big Cryptocurrency Craze - you would know that the beginnings of Ethereum were rocky.
Initially, the system was built for big Wall Street banks. Most of them influenced the development of the system.
There was a pre-mine that took place. Just look up Block 0 on Ethereum to see how much voting power and wealth was distributed there.
There are numerous incidents where the majority of the network was allocated in the source code of Ethereum.
There are many more instances, I could list here, but there is this great video that recaps all the problems with the merge. As well as this Reddit thread, which recaps all the necessary data to make up your mind. Like always DYOR but here is a start for you.
Next to all the points mentioned above many ETH miners who want to stay with PoW, have flashbacks to 2016, when the Ethereum Foundation already forced them to change. Back then a hack in the now-famous DAO, meant that ETH had to be hard forked into ETH as we know it these days ETC. There is a growing community these days that urge everyone to not merge and stay with PoW. Something that happened in 2016 as well, but it never managed to stick around.
These problems do not only attract peer-to-peer enthusiasts like me, but also the other spectrum, centralized individuals or as we call them these days, globalists. They are the ones promoting this merge. Funny enough they always portray Bitcoin and PoW as the enemy and solutions like Ethereum as the hero. But it’s that hero who up until now has been running on PoW.
Having these powerful players in there and seeing how much they want the merge to succeed leaves you wondering. After all, these are the participants the decentralized world wants to get away from as much as possible. A world Ethereum wants to be part of as well. With this bending towards central institutions, you’re left with a sour taste in your mouth.
It appears that Ethereum is forcing this change because it’s fashionable and allows them to obtain control over the network. Either because they like it or because they need to do their Wall Street friends a favor for their support back in Ethereum’s earlier days. Whatever the reason is, it will backfire and leave an already complicated ecosystem in even more trouble.
These issues could backfire not only with Ethereum but with Bitcoin as well. I believe we will see a lot of retail investors who will pull out. They’ll be left with a lot of frustration and don’t want to interact with the market again. Well, until the bull market comes back and they get in because of FOMO.
We’ll see a correction in the market. Which has always been great. Everyone will be able to stack their Sats cheaper and get on board with sound money.
With that in mind, keep your head down, get on board with Bitcoin if you haven’t yet, and enjoy the possibilities sound money gives you.