The End of Ethereum Forks: Why There Will Never Be a Second ETC
Editor's Note: This article comes fromBlue Fox Notes (ID: lanhubiji)Editor's Note: This article comes from
Blue Fox Notes (ID: lanhubiji)
Blue Fox Notes (ID: lanhubiji)
Foreword: The Ethereum of today is not the Ethereum of three years ago. Many DeFi applications have been built on it, and these applications are composable and interdependent. This makes any fork on Ethereum more difficult, not just a fork of two ledgers, but a fork of two ecosystems. Such a fork will lead to a choice in the ecosystem, because some applications cannot fork and can only choose sides.
After the 2016 DAO hack, the Ethereum community faced an existential dilemma: should the community roll back on-chain transactions, or let the hackers take their money? Some people agreed with the fork, and the current Ethereum (ETH) was born. Some people refused to roll back, and their persistence produced Ethereum Classic (ETC). This is a classic case of blockchain statecraft: by creating a fork, a few banding together can effectively break away from the majority.
However, there will be no truly meaningful minority forks in Ethereum in the future, which is largely caused by the inherent fragility of DeFi.
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thought experiment
Imagine a controversial EIP proposal, ProgPoW, being merged into the codebase and deployed in an upcoming Ethereum upgrade. The proposal would put current ASIC miners in a bind, and its polarization has plunged the community into internal strife.
Soon after, two camps emerged in the community: those who opposed ProgPoW and those who supported ProgPoW. As Reddit and Twitter users flex their allegiance online, a civil war is brewing and everyone must choose sides.
Meanwhile, DeFi operators wait and see anxiously. They have a dilemma: they cannot choose sides too early. Why? Because for DeFi operators, choosing the right fork is critical to the survival of their system, and no one wants to be blamed for causing more conflicts.
Let's assume USDC is the first to cross the Rubicon. (Blue Fox notes: Rubicon is the border river between Italy and Gaul. In 49 BC, Caesar led troops across the Rubicon River, which triggered a war. Later, when crossing the Rubicon River, there was an intention to actively challenge. Once this operation, the rest will inevitably happen. The meaning of this article is that USDC took the lead in choosing a side, and the result triggered subsequent events)
Suppose CENTER, the organization that issues USDC, announces that they do not support ProgPoW, and USDC will not be redeemable on the ProgPoW fork. Of course, this means that USDC would become completely worthless on the ProgPoW fork — USDC is the system of record for IOUs backed by USD, after all. There is only one system of record that corresponds to CENTER's actual liabilities, so the USDC ledger is meaningless on other chains. (Blue Fox Note: Because only one asset is mortgaged, it is impossible to redeem two assets)
As the second most used stablecoin in decentralized finance, USDC represents 99% of all fiat-backed stablecoins locked in DeFi applications.
Other fiat-backed stablecoins have negligible usage in DeFi. But, you might say, the market can solve this problem. Let other stablecoins, such as Tether and TUSD with billions of dollars in circulation, they can step up and take USDC's place.
But what about those financial institutions that directly or indirectly use USDC? Assuming that DeFi can survive without USDC, but given the various depths of entanglement in it all, it is undoubtedly a huge challenge to untangle it quickly and safely. (Blue Fox Note: In fact, there is also a problem with the assumption of this case: why is USDC the first to initiate, it is not a miner, it is risky to take the lead in choosing sides. Because USDC is only a stable currency backed by the US dollar, once the user applies for redemption, It is not impossible to switch to other stable coins. Of course, considering the depth of USDC’s integration in DeFi applications, USDC’s appeal is large enough for applications. But the problem is that USDC chooses a chain. What is the motivation? This needs to be discussed. This is the key to whether the above assumptions are reasonable. Welcome to leave a message to discuss.)
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pain of separation
Any DeFi application that does not follow USDC requires a coordinated withdrawal process: after the fork, everything denominated in USDC will become worthless (here only refers to applications that do not follow USDC). Considering the composability of DeFi, the removal needs to be coordinated across the entire ecosystem to complete. Just imagine its situation:
Fixed-term USDC loans or derivatives must be terminated early (Dharma and Nuo).
As people scramble to exit and try to sell their USDC positions, arbitrageurs (who convert USDC to USD) will not be able to withdraw quickly and the price of USDC will plummet.
Contracts like Compound could experience a bank run where most of the USDC is being lent out, preventing lenders from withdrawing their positions. This will increase the borrowing rate of USDC.
Holders of USDC who are in a passive position at this time have to go online, which may be difficult for those using cold storage.
In the face of such a bloody unbonding process, no matter how the community's opinions settle, DeFi operators will have no choice but to stand on CENTER's side and fully support the fork chosen by USDC. If they are flawed, then the damage is not just a technical nuisance: the real damage will come from user disruption and loss of trust. Financial systems and smart contracts are based on an assumption of predictability, and once it violates this, users are unlikely to come back.
If DeFi operators cannot keep up with the trend, the decentralized financial system will be thrown into chaos. This is a classic game theory situation: incentives overwhelmingly favor coordination, and thus, DeFi is forced to act together.
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The Valley of D-ETH
Imagine a small group of people doing a fork. They remain optimistic and have given their chain the brand image of Decentralized ETH (D-ETH). So, what will they find on the new chain? Like all forks, the overall state of all smart contracts will be migrated over, but there is no operator to maintain the operation, what will happen?
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permanence of memory
The oracle stops publishing streams. No more price information. Any application using the price feed will be broken.
Now all centralized stablecoins will be worthless. Tether, USDC, TUSD, PAX are all gone. Most operators freeze contracts, making tokens non-transferable and non-convertible. For smaller stablecoins, no one even bothers.
Any borrower who borrows USDC as collateral gets tokens for free. Of course, unless the borrowed token is Dai, they are all worthless. There isn't even a market for D-REP (a forked version of the REP token) on it because Augur doesn't run on it.
All long-term Augur bets will be effectively devalued. Not enough D-REP holders will show up and report the results. Doesn't even point to a version for D-ETH, though someone posted convoluted instructions somewhere on Github. Eventually, the contract stops functioning entirely.
Some contracts are still in force. Such as 0x and Uniswap, because they do not require any external actors to participate. (Blue Fox Note: For example, Uniswap does not need an oracle to report prices) But there is a lack of liquidity, and since all D-token prices have collapsed, there will no longer be correct pricing.
The moment the fork went live, shrewd arbitrageurs raced to attack mispriced 0x orders and the Uniswap market. Then, of course, there is the elephant in the room: Maker. Too much D-ETH is at stake in a minority fork and just ignore it.
They can pull the system through, but since the system is now backed by D-ETH instead of ETH, the system will be undercollateralized immediately after the fork. Almost all CDPs will be liquidated, and D-PETH must be auctioned off to D-Dai (the system destroys it to deleverage).
However, there is little demand for the auctioned D-PETH, and most D-Dai holders do not pay attention to the fork of the minority, so the supply of D-Dai is suppressed. This resulted in a massive undersupply of D-Dai, and at the same time, an oversupply of D-PETH being sold into the market in large quantities, leading to a deleveraging spiral and a huge price surge for D-Dai.
Seeing this happening, Maker governance decided to simply trigger global settlement on the minority forked chain. It's not worth the headache. All D-Dai on this chain are liquidated and eventually converted into D-ETH balances. Interested holders of D-Dai will go to get their D-ETH balance. But when they turn around and sell their new D-ETH, all this selling leads to massive exits, causing the D-ETH price to plummet.
This causes any application that relies on D-Dai to be immediately broken. Uniswap’s D-Dai marketplace, Compound’s D-Dai marketplace, Augur V2, and pretty much every project using D-Dai will now be disrupted.
All websites, interfaces, block explorers, and wallets ultimately point to the majority chain. Game operators such as CryptoKitties lock their D-ETH contracts so as not to confuse their users. The minority chain is so desolate that it is basically an empty blockchain.
If you imagine a movie version of this saga, the Chain of Minorities looks like an abandoned metropolis. The towering building was empty, the alarm was sounded, but no one responded, and smoke billowed in the distance. No one wants to rebuild for it.
Minority chain communities will whine about conspiracy theories. However, once the liquidity of D-ETH is reduced to negligible, it is clear that exchanges will no longer list devalued D-ERC-20 tokens. Economics will no longer be associated with these innovators. The early volunteer developers would stop showing up, the community would wither, and the project would eventually be abandoned like other ETH forks forgotten by history.
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Value of ETH
This little thought experiment tells us: Ethereum is not what it used to be. In 2016, Ethereum was just a proof of concept, and ETC could claim to be a better version of how the "world computer" evolved. But today, it's clear that Ethereum has value because of the systems it's built upon.
