How to Prepare for the Ethereum Merge
After having been postponed several times, the Ethereum Merge is finally happening. With it, the Ethereum blockchain will switch out its consensus mechanism, going from Proof-of-Work (PoW) to Proof-of-Stake (PoS).
The imminent update can be viewed as one of crypto’s biggest events in history. After all, changing the consensus mechanism of a globally decentralized network worth about $200 billion is true ingenuity of human engineering.
While there is a lot of excitement surrounding the Merge, there has also been a lot of preparation happening leading into the Merge. One of the most pressing questions has come from everyday crypto users holding ether: How should we prepare for the Merge?
Users don’t have to do anything
It might sound odd but a totally viable strategy for users is to do nothing and sit out the approaching Merge. This option is not only the easiest, but it is also the safest. This is because, from a user’s perspective, the upgrade to PoS will be seamless. Ethereum coin holders won’t have to do anything. They can just leave their ETH in their personal wallets or on a personal exchange account during the time of the Merge. Once the update is done, their Ether will be that of the new PoS-based Ethereum chain. Also, any ERC-20 token a user might be holding will automatically exist on the new network.
Consider ETH staking
As a user holding ether, you might not have participated in staking yet because you remained unsure whether the Ethereum Merge was really going to happen. If this is the case, you might want to reconsider your decision and prepare for staking now that the Merge is about to happen.
While you could run your own validator node to do staking, setting up such a node is no easy task. Besides that, you would need a total of 32 ETH to run your personal validator node. However, there are other options that are not only easier but don’t require you to possess the total amount of 32 ETH.
The most obvious place to start staking is the liquid-staking sector. Several players like Lido, Rocket Pool, or StakeWise allow you to stake your ETH by unlocking the liquidity of ETH via staking derivatives on the PoS-based Ethereum blockchain (referred to as the Beacon chain). While staking is optional, any ether holder should consider staking their ETH sooner or later. After all, not having one’s ETH staked equals a dilution on part of the non-staker as the staking rewards do come from the network’s coin issuance.
Playing the Merge
Considering DeFi projects like the abovementioned staking providers could also be interesting from a trading/investing perspective. Their tokens (LDO or RPL) represent a “higher beta” bet on Ethereum’s Proof-of-Stake transition. As the last few weeks have shown, this narrative play has already been playing out as the token prices have been on the rise.
A pure arbitrage strategy some investors have been applying is the so-called cash-and-carry trade. They have been buying futures and selling ether on the spot market. This has been possible because ETH futures have traded lower than ETH spot prices.
Other investors have been long ETH only going into the Merge. Without being market neutral, their goal could be to sell ETH once the Merge has passed — applying the well-known trading strategy “buy the rumor, sell the fact.”
Interruptions on CEXs
If you plan to trade your ETH during or immediately after the Merge, be aware that several exchanges (CEXs) have announced that they will pause their ETH deposits and withdrawals in between the beginning and the completion of the upgrade. This phase is estimated to take place September 14-15, 2022.
To be informed about the exact time of the pausing, it is best to follow and monitor the Twitter accounts of the relevant exchanges as they are most likely to announce the exact timing on their social media platforms. To avoid being caught off guard anyhow, you can already send ETH into your preferred exchange before deposits and withdrawals are halted. Trading should be working as usual, even during the exact time of the Merge.
An option for long-term ETH holders
The volatility the Merge might cause will most likely offer opportunities for long-term ETH investors. One of them could be staked ether, commonly referred to as stETH. As we have seen during the last few months, the peg between stETH and ETH has been fluctuating, making it possible to buy into stETH at a discount. However, with the Shanghai update following a few months after the Merge, stETH will finally be claimable. For a patient investor, a widening of the stETH/ETH pair during the upcoming Merge days could present a safe buying opportunity as discounted stETH can be bought that will be redeemable for ETH.
Mind the forks
During the last few days, we have also seen lending rates for ether rise significantly as people have started to borrow ETH. While this represented an opportunity for ether lenders to profit from high lending rates, the popular DeFi platform AAVE — through a governance vote — decided to stop offering ETH loans to avoid liquidity issues. But why has ETH borrowing exploded? Everyone currently wants ether in anticipation of the possible Ethereum forks because owning ether at the time of the fork will entitle holders to receive the coins of these forks.
With ETH PoW (ETHW), one fork has already been confirmed to happen and it will be deployed within 24 hours of the Merge. Most importantly, the team behind this fork has announced that the ETH PoW chain will switch to a new chain ID. This will make sure no relay attacks will be possible on ETH PoW, meaning that users on the fork chain won’t fall prey to double-spent attacks and thus be stripped of their tokens. Important to note: With any other forks that could potentially emerge from the Merge such safety measures have not been confirmed.
How to prepare for the fork
Anyone willing to claim this ETH PoW coin will have to prepare the crypto wallet to receive it. To connect to this new fork chain, you will have to find the RPC details that will help you configure your wallet. As of now, the team behind ETH PoW has not yet published this information. To make sure you do not miss the announcement, it is best to follow ETH PoW on Twitter.
Configuring your wallet with the correct details is not the only preparation you have to make if you want to get the fork airdropped to your wallet. To make yourself eligible in the first place, it is best to hold in your own wallet. Also, you’re advised to hold ETH on the Ethereum mainnet, meaning on the Ethereum blockchain itself. Keeping ETH in any of the existing second-layer solutions (Polygon, Optimism, or Arbitrum, for example) will not get you the airdrop. Keeping your ether on an exchange is no guarantee either, although several exchanges have announced they will credit their users with the ETH PoW fork. These exchanges include Poloniex, Binance, FTX, MEXC Global, and Gate.io.
Thoughts for ETH POW sellers
If you are seriously looking to sell the ETH PoW fork for USD or ETH, you want to make sure you have several options. Thus, it is best to set up an account with more than one crypto exchange that will support the fork. In case the exchange of your choice is down and cannot be accessed, you will have more options to sell.
While selling your ETH PoW fork coins for a profit seems like an exciting opportunity, you should be aware that it most likely won’t go down too easily. Once the fork will be available, it will probably be bots that will get the highest chances of selling their coins because they manage to get included in the blocks during the first few minutes to hours. Your time as a normal user could come once the dust has settled and the initial volatility has somewhat subsided. In that case, you might not be able to sell at the top anymore but may still get some bang for the buck.
Last but not least: Look out for scams. There will undoubtedly be many fake airdrops around the Merge date. Be careful what websites you interact with. As a general rule of thumb: Always make sure that you only visit official websites and never hand out any private keys in the process of claiming anything.
A few words to DeFi and NFT holders
Given that there will be at least one fork, there will be at least two versions of every DeFi token and NFT that exists on Ethereum today. The projects behind these tokens will have to decide which chain they will support going forward as it is unlikely that they will want to sustain two versions of themselves.
It is to be suspected that in most cases, the new Ethereum based on PoS will be the way forward for most projects. So, most projects on the fork version will be close to worthless as there won’t be any liquidity. Nonetheless, it might be the case that an NFT project for example will keep on supporting the old PoW-based Ethereum version and the project might end up keeping some value driven by the narrative of it being the original. As such, DeFi as well as NFT holders should be prepared to monitor their tokens for any residual value that could be realized following the Merge.
How to prepare as a miner
A lot of preparation has been going on among Ethereum miners as they stand to lose their business once the Merge has passed. In order not to be left empty-handed after the Merge, miners have been looking to alternative blockchains to continue their mining operations. These include GPU-mineable coins like Bitcoin, Litecoin, Bitcoin Cash, Monero, Zcash, or Ravencoin.
The most likely profiteer could be Ethereum Classic. The Ethereum fork from 2016 has been living in the shadow alongside Ethereum ever since, but never completely disappeared. Now that Ethereum mining is set to terminate because of the Merge, the interest in Ethereum Classic has surged.
In choosing a PoW-based blockchain for their future mining operations, Ethereum miners have to think about what network will have value going forward. Although switching their hash rate to this blockchain might boost a network’s value in the short term, the blockchain will have to have a real use case for its coin to continuously accrue value and present a profitable option for miners. As it stands, there could be some intrinsic value in a PoW-based smart contract platform, which Ethereum Classic could stand to become. Alternatively, this PoW-based smart contract platform could also turn out to be the ETH PoW fork — a reason why current Ethereum miners are also taking steps to potentially mine this fork should it prove to be successful.
And some miners also see a non-zero chance that the Merge turns out to be unsuccessful and their mining power will still be needed. When you come to think of it, miners have to be prepared for more than anything. After all, they have a lot at stake (no pun intended).
So, whether you are a user, an investor, or any ETH stakeholder: Make sure you understand that there will be a lot of uncertainty surrounding the Merge.