Kain Warwick, the founder of one of the most prominent defi dapp, Synthetix, has stated that chaos is what he’s here for as that’s exactly what the defi land in the proposed EthereumPoW chain-split is going to be.
“Ok let’s say miners fork to a PoW chain. We then get two versions of everything, but a lot of DeFi on this chain will be in a weird limbo state,” Warwick said before adding:
“It will keep working in theory. But you will have like powDAI backed by powETH. Assuming liquidation bots operate that’s gonna be wild.
Like let’s say powETH is worth $100. Last time I checked the Maker death spiral liquidation cascade starts at like $500. And don’t even get me started on Liquity and Synthetix. Also USDC is worth literally $0. Maybe OHM weirdly mega pumps though, let’s pray for that outcome…
I can’t see LUSD surviving tbh. The sell pressure on powETH will be epic as liquidation across the board kick in. Curve will get drained for everything against USDT/usdc. I don’t see how a reasonable person could see this as anything but courting chaos. Which I’m here for lol.”
We would have liked him to go on about how he thinks Synthetix will dance in this situation as their sUSD initially started off being backed by only eth.
Therefore some parts of Synthetix may well keep working, though something like sBTC on ETHW will probably have a different price from the actual price of bitcoin which is correctly tracked by sBTC in the actual upgraded Proof of Stake eth.
While something like LUSD should work as normal even on ETHW. This is basically DAI, but with just eth as collateral, the difference being they have a one time fee rather than a variable interest rate.
The only problem LUSD would have in EthereumPoW is the occasional problem of price falling 80%.
That has happened a few times for eth, though usually somewhat more slowly than fairly instantly as may be the case for ethw, but in the 2018 bear cyptos did fall something like 80% within hours before bouncing as hard.
So there will be chaos, however that chaos will be on ethw, so who cares. In eth proper, everything will run as normal, so the ethw playground or mess won’t have any actual consequences, and thus doesn’t really matter.
Yet that ethereum can be forked even with the whole defi ecosystem arguably does matter and quite a lot because forking is the ultimate prevention against capturing and forkability is the most objective definition of decentralization.
Yet Marc Zeller, the Head of Developers Relations at Aave, is so against people exercising their right to choose that he asks:
“Should we organize a snapshot vote to make Aave frozen and unusable on ethPoW?”
He does however also say: “My personal take is that it’s not worth the focus, but in any case, aave is DeFi and only governance can decide this.”
Imagine the US president announcing a referendum on whether bitcoin should be banned. Here it is slightly different in that just a dapp would make a decision for itself, but it’s still the attitude of don’t like it, so let’s ban it.
Any astute observer would of course wonder whether that’s just a cover because if they do ban themself, the market would always be left to wonder whether Aave can actually run by itself.
Because although a lot in Aave might break, the flashloans part shouldn’t break in ethw, and so we can all see just what runs and just what doesn’t, if indeed it can run at all.
A Dangerous Argument
“USDC’s decision of which chain to consider as Ethereum could become a significant decider in future contentious hard forks,” Vitalik Buterin, ethereum’s cofounder, said at the BUIDL Asia conference in Seoul on Wednesday.
This is an argument developed in 2019 whereby a suggestion is made that ethereum is now unforkable due to defi as the decision of USDc and USDt would force all other dapps to follow because they are so integrated in all dapps that they basically can’t work without.
However, the more correct argument would be that centralized and semi-centralized components would be unforkable, and even then only without manual intervention. Everything else would keep being forkable.
Let us suppose that the argument is not about PoW or PoS, where the community is not split with this fork being more that miners want to keep mining and some think there might be a market – which we can’t quantify – for direct network access to the asset, but something that is a genuine split.
The blocksize debate is an example of that, and in such instance Coinbase, which operates USDc with Circle, could come up with more creative solutions such as saying that 1% of USDc in the PoW fork will be backed from their profits.
In addition, although the value of USDc should go to zero in the unbacked fork in theory, in practice no one can say that it would, at least in the first days or even weeks, because it has never been tested in practice.
You’d have the mechanical constrains of selling USDc in any event, putting a bottleneck, with a value of non zero probably guaranteed because UST is still worth 3 cent. A more intriguing point would be whether a non backed make belief value is formed even at levels above that. Afterall, fiat banks don’t even operate on fractional reserve anymore.
But of course, compared to actual eth where USDt or c is 1:1 and everything works fine, a lot of stuff on ethw wouldn’t be working.
However, looking at it from a forkability perspective, all of it will actually keep working, even centralized components, just with some price adjustments.
The suggestion therefore that USDt or c decide forks is a limited perspective and it is wrong as the network is far more complicated and here it is similar to exchanges deciding coin tickers.
That’s a high stakes and a high risk business where both sides have pretty much everything to lose if say some exchanges call BTC the BCH coin and some vice versa.
So stablecoins have to make a bigger decision than the rest in genuinely contentious circumstances, and even if one went to one and the other to other, it would still be far less chaos than if exchanges played with tickers.
So do exchanges decide? That’s what Gavin Andresen, the first bitcoin lead developer after Satoshi Nakamoto, thought. That too was wrong with the decision in the end truly being no one’s and everyone’s in different balancing pillars where neither is quite decisive on its own.
Here on this fork we don’t expect stablecoins to go different ways, or any shenanigans whatever. ETHW is just a backup. The main network is eth obviously. They’ve conceded the ticker already, so there’s nothing to argue here and there’s no debate as such that matters. It’s just a backup.
And as a backup, especially in light of arguments that corporations can decide eth’s way, you’d expect at least the cypherpunks to assist in seeing what runs and doesn’t.
Because no one can predict the future and no one can predict whether a genuine fork against the will of whoever or whatever might be needed. So it would be useful to see just how it works now with all this stuff.
The Need For Ree
But some take a different view with the Frax stablecoin putting forward a proposal to only be redeemable on the Proof of Stake ethereum blockchain.
“They are 91% backed by USDC, is it really in their hands to make a decision?” – someone asked with Sam Kazemian, the founder of Frax Finance, stating:
“First of all not true, that’s not how FRAX works. Second, even if it was true, yes it’s in our hands. If USDC is only redeemable on ETHPoW (it won’t be), the Frax DAO can just sell all USDC it has for a fiatcoin that is redeemable on PoSETH & deposit that in the treasury contract.”
The project seems to be interesting with their stablecoin using both collateral as well as algorithmic components, allowing for lower collateral requirements.
As a stablecoin, they might also need to choose just one chain, but for a lot of projects this can be an opportunity to showcase that they are really fully decentralized and they can work on a forkchain.
Because one can argue that while the devs do all their tests and so on, and the Nakamotos do their own tests, the public has its own test too.
Therefore taking a non-neutral approach for dapps can carry risks because is something like Frax for example really decentralized?
Their USDc component may of course cause some troubles, but what would run, how would it run?
The project states “the end goal of the Frax protocol is to provide a highly scalable, decentralized, algorithmic money in place of fixed-supply digital assets.”
Very interestingly, they have a stablecoin tracked to CPI, but from Kazemian’s description of this DAO that can just sell USDc, decentralized wouldn’t quite be the description unless the DAO is somehow a smart contract that is automatically bound and automatically executes the tokenholder’s vote.
Still it can be sufficiently decentralized and probably can keep working to some extent on the forkchain, but of course it’s up to dapp devs to decide how they view all this.
They may think that what runs, runs, and they won’t do nothing. They may do the very basics, like change Oracle feeds or whatever is the bare minimum for it to run at its minimal best. They may even go further and actually try to make it work well. Or indeed they may take action and put effort to destroy the dapp by freezing it as Aave’s dev relations man proposes.
On a technical level, it is difficult to see a reason to take a negative action, like freeze a dapp. That’s even for things like USDt, although there they might think of doing it to avoid confusion with the new USDt they might issue once the chain has forked.
Even then however there probably are many USDt clone scam contracts, so freezing might not be necessary.
A Showcase of the Superiority of Decentralization
Someone mentioned that all those who borrowed on Compound by lending USDc, now get free tokens on EthPoW.
That was as an argument against the fork, but without a fork, no one gets free tokens. At least someone might as well do so.
Making it more an argument against USDc or t, and to some extent DAI which is partially backed by both, because whatever convenience they might have, comes with the inconvenience of not quite being able to fork them.
For USDc and t, this is of course nothing new. For DAI, there have been many debates in their own forums whether all these unforkable assets add too much centralization.
Nowadays there’s LUSD, so the answer may well be diversity, but one can imagine circumstances where the lack of forkability can be a significant mistake.
Since a PoW transition to PoS has never occurred on a major coin, and since there’s no concrete data to show just how much of the demand for eth is from the ability to directly access the asset through mining, in some fantastic realm it may well be possible that the PoW fork flippens eventually due to that demand.
This is unlikely, but if it happened, any dapp that can operate fine would be unaffected, while other dapps might lose the edge.
For something like USDc or t, this is not a problem as they can just issue wherever. But for something like DAI it can be a problem if LUSD catches on for example to the point it is too late.
Hence those arguments about adding USDc collateral, which were dismissed by these pages and ignored, now appear to have had quite a point.
There’s always tradeoffs however, and dai may at least somewhat work, while USDc, in theory anyway, should insta go to the absolute zero.
But, this is very much an occasion to be reminded again as to why we decentralize, and why this fork, with whatever actors and aims, can court some backing as a showcase of that decentralization, at least whatever is left of it.
Because it is still very much the case that we’re not quite ready to give up the public’s control over all this, and whatever corporations might dream of decisive influence should instead see why digitally native is superior.