When money is untethered from reality, you wind up in clown world.

Lately I’ve been drilling down on the difference between Proof-of-Work and Proof-of-Stake. Why does it matter?

I used to think it didn’t matter too much. My view toward the entire burgeoning asset class of crypto was “let a thousand flowers bloom”. I still think that way to some extent. If you want a proof-of-stake system for an application, a game or a project token, be my guest. It works in some circumstances.

But as a base layer for sound money, it’s an abomination. The reason why has been articulated in innumerable places, but it recent times it was George Gilder who really nailed it in The Scandal of Money: Why Wall Street Recovers but the Economy Never Does. The book unpacks the consequences of untethering money from solid anchors to reality:

“With no [hard] dollar anchor for long-term investment, financial horizons shrank and markets dissolved into trading over bets on bits….The collapse of productivity growth after 1972 must be deemed just another of the cascading effects of the destruction of money as a metric”.

He was talking about high time preferences, as do a lot of the Bitcoiners. What exactly the consequences of untethered money and shrinking “investment” horizons would mean when it became systemic,  saturating all avenues of traditional finance conventional economic thinking.

“[Where there are] no limits to the tempests of short-term trading and trafficking in a surf of meaningless money values.”

This expression of short term trading within meaningless monetary values found no greater expression than during the blow off top of The Everything Bubble that occurred under lockdowns, stimmies, SPACs, meme stocks, Davie Daytrader, and even crypto moonshots like LUNA and NFTs. Possibly the best phrase I’ve heard for it was Hidden Force’s Demetri Kofinas’ term, “financial nihilism”. 

That’s what you get when you untether money from any foundational anchor to the real world.

Hold that thought.

The decision (top down, non-consensus driven) to move to PoS on Ethereum’s part, to solve a largely non-existent energy consumption problem, got me thinking about this and researching it a lot more. 

Let’s start with the rationalization direct from Ethereum CEO Vitalik Buterin, 

“To summarize this in a more philosophical way, Proof-of-Work is based on the laws of physics, so you have to work with the world as it is. You have to work with electricity as it is, hardware as it is, what computers are.

Whereas because Proof-of-Stake is virtualized in this way, it’s really cool, you get to create a simulated universe that has its own laws of physics. And that just gives us protocol developers a lot more freedom to optimize the system to give us all of the security properties that we want. 

If we want the system to offer a certain security guarantee, that means we can modify the system in way that lets us achieve it.”

Buterin is making our point for us, without realizing he’s making our point for us. He is expressing the ultimate technocratic fantasy: the ability for managerial experts from on high to reorder reality according their own whims and priorities. Where models can be created on whiteboards and reality is expected to conform to these models. It never does, yet we live in a world where people who point out that the models are flawed are demonized while those who bear no consequences for being wrong, double down and are awarded Nobel Prizes.

But when whiteboard economics inevitably collides with reality – those pesky laws of physics – the models never hold up. Reality intervenes, and the modellers either double-down or create some new set of policy responses to “fix” the latest , self-induced, crisis.  

The economic and societal chaos we are in the early innings of experiencing today is a direct result of iterative cycles of “money” being detached from the laws of physics, a.k.a. reality.

This is why we can’t have nice things.

In order to regain a tether to reality, we need a monetary hard asset that can’t be arbitrarily modified by anybody, let alone a nation state, central banks, Klaus Schwab, PayPal, big tech in general, or a pyjama boy with a hard-on for virtual reality. 

It’s that anchor to reality, to the laws of physics, that make Proof-of-Work such a breakthrough innovation. At the risk of expending too much airtime on it here in the portfolio update, I will direct you to two episodes of The Investors’ Podcast network with Preston Pysh:

#1: BTC098: Proof of Stake (PoS) Versus Proof of Work (PoW) w/ Jason Lowery

It’s over two hours long and it takes Lowery a long time to lay the foundation for his case. Hang in there. Once he squares the circle you’ll get it. When I finished this episode it gave me absolute clarity on why this is such a fundamental issue and why Proof-of-Work is an unassailable and superior innovation vs. Proof-of-Stake in every way. At least it is when you want to create a base layer for sound money.

#2 BTC099: Michael Saylor’s Deep-Dive on Bitcoin Energy Misconceptions

Saylor extends the understanding in this interview, especially where it comes down to the difference between securities (Ethereum) and commodities (Bitcoin), and why this is such a big deal. The conversation then moves into why the anchor to physics is a feature, not a bug. 

The interview helps reconnect us to the reality that energy usage (or cost inputs) to build something useful are necessary, not evil. In Ethereum’s case, the impetus for the merge was to reduce its power consumption. Why?

In last month’s letter I did some back-of-the-napkin calculations showing that Ethereum’s total power consumption worldwide was about 2/3’s the total consumption of US electrical vehicle deployment. Why is it A Bad Thing when you use the energy to run an ostensibly distributed, universal Turing-complete super-computer under Proof-of-Work, but then it’s celebrated as a milestone when you use even more energy to run a bunch of EVs  – which end up being charged by coal and built with lithium and cobalt sourced from child labour?

95% coal, actually. Love this clip. “The elEctrIcitY cOmeS fRoM iNsIde tHe bUIldiNg!” https://t.co/hP2dgHn32e

— Mark Jeftovic, The C̶r̶y̶p̶t̶o̶ ₿itcoin Capitalist (@StuntPope) June 8, 2022

What makes each one so? Without looking at the energy consumption and benefits or drawbacks of comparable systems (i.e. the energy consumption of maintaining the petro-dollar empire), looking at an amount of energy consumption unto itself is meaningless.

Further, once you concede that any given activity’s energy consumption is within the purview of societal moderation or judgement, you just ceded authority over all energy consumption.

People seem to be clamouring for this, we’ll see how they like it when CBDCs finally show up with Personal Carbon Allowances baked right into their wallets.

Bitcoin is the most viable base layer today for re-attaching money to reality. It does that through Proof-of-Work, not in spite of it. We already know that total Bitcoin energy usage worldwide is less than tumble dryers, and that Bitcoin mining is incentivized to use waste, renewable and stranded power sources. It’s the tie between energy input and digital output that tethers the base layer to the laws of physics, which is out here in real world, where (everybody outside of the pod), spends their everyday existence.

Without that tether, we eventually wind up in a clown world where central bankers get Nobels for blowing up the financial system, where climate alarmists want to end oil on one hand yet advocate for nuclear warfare on the other.

Today’s post was an excerpt from The Crypto Capitalist mid-month portfolio review, our premium newsletter. To get the core investment thesis free, subscribe to the Bombthrower mailing list. Follow Mark E. Jeftovic on Gettr, Twitter or join the Telegram.

Outside of China, no major nation has anything else ready

Imagine if you will, persistent double-digit inflation, energy costs soaring, shortages causing blackouts across Europe, bond yields spiking uncontrollably, supply chains grinding to a halt while sovereign debt crises erupt the world over…

Then one Friday after the markets close, heading into a long weekend, an emergency broadcast occurs in which the President, the Chairman of the Federal Reserve and the Speaker of the House appear on national TV to announce  that pursuant to the Statutory Bail-Ins provision of the 2010 Dodd-Frank Bill, a banking holiday would take place over the following week. During that holiday, certain bank liabilities would be converted into FedCoin (FED), an ERC-20 token on the Ethereum blockchain, at the rate of 10 FED per $1.

Every depositor would have an NFT issued to their Social Security Number – and that would give them access to their FedCoin via the Sign-On-With-Ethereum protocol. Depositors would have to “stake” their Ethereum to access the “full benefits” of FedCoin, however any sub-optimal social behaviours, (such as being behind on current vaccinations, or running your air conditioner too cool) could result in “slashing” – having a portion of their staked assets “burned”.

Similar announcements are being made elsewhere: in Canada Prime Minister Freeland and her Finance Minister Steven Guilbeault announce the creation of LOONCoin, invoking the The Bank Recapitalization (Bail-in) Conversion Regulations from 2018 while in Australia they refer to Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill of 2017.

Across the G-20, each leader is calling their national initiative part of The Great Restructuring…

We’re into the Endgame for Late Stage Globalism and things are moving fast. Decades of increasingly centralized, fiat-based plunder are now coming to a head and the system is unraveling quickly:

• Energy costs are skyrocketing thanks to ESG-inspired shortages.
• Inflation rates exceeding the stagflationary 70’s are hitting across the board and in some areas (Turkey, Argentina, Sri Lanka, Lebanon) verge on hyper-inflation .
• The global bond markets could come unglued at any moment as trapped Central Banks are trying to hike into a global recession.
• Geo-political tensions (even amongst NATO allies) eerily reminiscent of the months leading up to 1914, when the world “sleepwalked” into the first industrial scale global war.
• Political and cultural elites the world over have never been more unhinged and detached from reality.

Many commentators are positing a monetary end-game scenario in which the Fed and other central banks really do lose control of the bond market, the 150 to 300 trillion (depending on what you include) global debt implodes, and the financial system itself enters the collapse that has been serially postponed since the dotCom bust….

The mini-parable in the opening paragraphs outlines the situation many of us who are skeptical of the current system anticipate: that there will be an inevitable move toward Central Bank Digital Currencies (CBDCs). It will be seen as a way to extend the lifespan of fiat-based financial system by a few critical decades while presenting an irresistible mechanism for asserting China-style social control in a way previous authoritarians could only dream of.

There have been plenty of government white papers issued (which we diligently cover in The Crypto Capitalist Letter), which uniformly outline the aspirations of CBDCs, namely:

• Expiry dates on “cash”.
• Negative interest rates on savings.
• Programmability over where, when, who and why money gets spent
• Transaction level reporting, tracking and taxation
• Quotas, limits and restrictions
• Ability to add or remove funds remotely by central authorities

There’s only one problem…

No nation or central bank outside of China is anywhere close to actually deploying a national Central Bank Digital Currency that is capable of doing these things.

For awhile it looked like maybe Facebook’s Diem would be at least a temporary FedCoin, until Facebook scrapped the project (they’ve since sold the intellectual property to Silvergate Bank).

But in practical terms, nobody is ready. The countries that have deployed a home-rolled CBDC have flopped (i.e, Nigeria, Venezuela,) even China’s Digital Yuan debuted during the Olympics to ho-hum reviews.

A national CBDC would be impossible to develop in secret and then spring on a population out of nowhere. Whatever gets adapted to be the rails for globally inter-connected CBDCs will leave footprints, big ones. People who pay close attention to Bitcoin, crypto-currencies, digital assets and blockchain would hear about it and see it coming from a long way off, and nothing that’s known to be in development (like Canada’s Project Jasper) is ready (or stalled).

However, the financial system is now coming unglued so quickly that there probably isn’t time to develop national CBDCs from scratch anyway, at least not for an advanced G-20 economy.

The solution may be to co-opt an existing crypto-currency that is already deployed, already has market share and a brand, and is more or less signalling an amenability to the notion.

Enter Ethereum: The Preferred Crypto-Currency of Central Banks (and The WEF)

The advent of Bitcoin was a shot across the bow of all central banks and fiat money.  We see, for example, a near visceral reactions toward the threat posed in various Bank of Canada documents (obtained via an ATIA request):

At the supra-national and NGO level, everybody from the World Bank, to the IMF to the World Economic Forum is somewhat hostile toward Bitcoin. WEF articles about Bitcoin typically end with “problems” associated with it and what the alternatives are , going so far to declare in 2017 that by 2020 “Bitcoin would consume more power than the entire world does”.)

Fact check: #Bitcoin did not consume more power in 2020 than the entire world did in 2017. @wef pic.twitter.com/1nTwi99Xgp

— Mark Jeftovic, The C̶r̶y̶p̶t̶o̶ ₿itcoin Capitalist (@StuntPope) September 5, 2022

So it is interesting to notice a crypto-currency that these international bodies and central banks are not openly hostile to, and that has always been Ethereum.

The main thrust of Canada’s CBDC development has been (thus far) “Project Jasper”, a partnership between the Bank of Canada, Payments Canada, R3 and the big banks, and note that Phase 1 was built atop Ethereum:

(Phase 2 was to be built on Corda “a leading Distributed Ledger System for regulated industries”).

So far Norway and Israel have started their CBDC development using Ethereum. In 2021 a Chinese banking official made the case for deploying a CBDC on Ethereum, and in at the WEF meeting in 2020, one of the Ethereum co-founders and Consensys CEO Joseph Lubin presented a white paper making the case for Ethereum to be the rails for CBDCs.

“As the World Economic Forum meets in Davos for the 50th time, it does so against the backdrop of a sea change in the mechanics of money

Below we provide both an overview of CBDC and a concrete example of how a CBDC might be implemented on the Ethereum blockchain. We believe that Ethereum is the best-suited blockchain network for the kind of maximally secure, global-scale, interoperable settlement platforms that CBDCs require. But we are well aware that there are many other possibilities”

To be clear, I am not one of those people who thinks the WEF is some all-powerful cabal that Controls Everything, because the reality is that the world is inherently uncontrollable at a macro level (we live in an out-of-control world, and for many, the prospect of that is more terrifying than dystopia).

But what happens in Davos doesn’t stay in Davos. The WEF agenda truly does exert outsized influence (at least for now), and they do set tone for what is fashionable among technocrats, authoritarians and the sundry Malthusians that permeate elite circles.

Ethereum (or maybe “CBDETH”) is well suited for the use case of global CBDCs:  different ERC-20 tokens can be issued for multiple uses:  stablecoins, UBI, food stamps, carbon quotas, social credit – all underpinned by Ethereum on the base layer. One that has a proven track record of being willing to switch monetary policy on-the-fly, and isn’t afraid to hard-fork itself out of a jam.

For the push into Digital-IDs, ERC-721 style NFTs are well suited. Your Bored Ape not only telegraphs how cool you are, it can signal if your COVID boosters are up-to-date, for all to see, on the blockchain.

At first glance this runs counter to what I’ve been saying in The Crypto Capitalist (our premium letter) for over a year. My theory was that in the future, the way you would be able to differentiate between a decentralized, digital bearer asset and a CBDC would be whether it would be possible to self-custody your private keys or not.

Maybe I was wrong about that, since anybody can hold their own wallets for Ethereum.

However, we should expect that the plebes would be incentivized to custody their private keys with banking partners of the CBDETH system (“safely and effectively”). There might even be incentives for doing that, like extra meat allowances, or permission to take an additional flight each year.

The Ethereum ecosystem is already telegraphing a willingness to comply with central state dictums: embracing OFAC compliance with a hamfisted stab at protocol level transaction censorship, rather than arguing about it too much. The coming move to PoS is flat out ESG-inspired (this is not the place to argue the energy policy of PoW other than to say that the alarmism around it is based on pure ignorance and FUD; but at a minimum I would recommend Alex Gladstein’s “Hidden Costs of the Petrodollar” and Nic Carter’s “Last Word on Bitcoin’s Energy Consumption“)

After The Merge (a.k.a Ethereum’s Great Leap Forward), if we can envision a scenario where most of the ETH is locked up in centrally operated validators, and a huge chunk of the system having already enacted protocol level transaction censorship, it would be perfect. Outwardly it could be the branded as a decentralized, inclusive digital money while in reality being highly concentrated and censored at the transaction level.

Similar to how the WEF brags they’ve “penetrated the cabinets” of many world governments, the Venn diagram of WEF and upper echelons of the Ethereum Foundation already intersect in a few places. In addition to the aforementioned pitch by Ethereum co-founder Joseph Lubin, the Ethereum Foundation’s Executive Director is “an agenda contributor” to the WEF.

The there’s the Enterprise Ethereum Alliance is a who’s who of big tech, Wall St and corporate big wigs, including JP Morgan, Microsoft, Accenture, Bank of New York Mellon, Ernst & Young and even Fedex Corporate Services Inc.

Contrasting Ethereum with Bitcoin

With EIP 1559, Ethereum ostensibly adopted a “ultra-sound” monetary policy where the supply of ETH would actually plateau and then begin to decline as more ETH gets “burned” than minted. However even this update, combined with the looming switch from Proof-of-Work to PoS shows: The Ethereum core devs have no issues radically restructuring its underlying fundamentals to suit the winds and the whims of it’s circumstances.

From its initial ICO to insiders, launching with an unlimited supply, to bailing themselves out after their DAO was hacked, Ethereum has a “whatever it takes” approach that is the opposite of an immutable, hard asset with a finite supply like Bitcoin.

If circumstances arise where an infinitely expandable money supply is desired or required, they can just change the system again. And again.

Contrast with Bitcoin, which is truly decentralized, with an immutable hard cap that cannot be changed. If there are dissident factions, like during the  Blocksize Wars, for example, it gets settled with a hard fork where users choose which way to go and market forces settle the rest.

On that note there is even already  a Proof-of-Stake version of Bitcoin.

So if we truly value democracy over coercion, and if Proof-of-Stake is demonstrably better than Bitcoin core’s Proof-of-Work, then we should see “Bitcoin-2” flippen Bitcoin in due course (similarly, and this is my main beef with The Merge, the more democratic way to undertake it would be with a user-selected hard fork, leaving both chains and options available afterward).

Of course, nobody seriously expects Bitcoin2 to do that. Nor does anybody expect Ethereum to postpone the merge or do it in a more democratic manner . But we can expect Bitcoin to be the one, immutable digital bearer asset in the coming era of Central Bank Digital Currencies.

Conclusion

In The Crypto Capitalist Manifesto, I built on my previous work around The Great Bifurcation and theorized a coming two-tier society. I posited that UBI would be inevitable and the rails would be a CBDC that doubled as a China-style social credit system. Everything that’s unfolded since then has reinforced that belief.

What I may have not foreseen was what the rails for CBDCs could very well be Ethereum, or a co-opted version of it. Beacon Chain (the post-merge chain) may be that version.

It’s too early to say how to feel about that. I’ve always had a soft spot for Ethereum, and admired what they’ve done in decentralized naming with ENS. My main business has been involved with that effort for some time. I guess watching it position for mainstream / corporate / government  acceptance is somewhat disorienting.

(Maybe it’s a good thing that the fiat-era’s last ditch iteration of state-sponsored money will have to be, out of necessity, built on something beyond their absolute control… another marker of the decentralized revolution?)

However, where Bitcoin reached escape velocity and broke the “here to stay” barrier through sheer honey-badger belligerence, Ethereum seems to be getting there by “playing the game”.

That’s also not to say that with our investor hats on, there aren’t going to be huge gains to be made within the Ethereum ecosystem even if it goes that way. If Ethereum becomes the rails for global CBDCs (CBDETH), owning the infrastructure components of it (oracles, validators, exchanges, dapps, naming platforms) would be the analogous to owning a small slice of the Federal Reserve, or the global ACH payments system.

But I stopped thinking of Ethereum as immutable some time ago, and certainly not as a digital hard asset, the way I do Bitcoin.

Three reasons why The Merge proceeds at its own peril

“I personally like hard forks. Particularly, I like the fact that they give users a measure of control, requiring them to opt in to protocol changes. Sure, they can be a little more chaotic if they’re controversial, but that’s the price of freedom.”
— Vitalik Buterin

“Within the ranks of the people, democracy is correlative with centralism and freedom with discipline. They are the two opposites of a single entity, contradictory as well as united, and we should not one-sidedly emphasize one to the denial of the other.

Within the ranks of the people, we cannot do without freedom, nor can we do without discipline; we cannot do without democracy, nor can we do without centralism. This unity of democracy and centralism, of freedom and discipline, constitutes our democratic centralism. Under this system, the people enjoy extensive democracy and freedom, but at the same time they have to keep within the bounds of socialist discipline.”
— Mao Zedong, 1957

In 1958, Communist China’s Mao Zedong undertook a comprehensive program to reorganize his country’s agricultural engine into a Communist Utopia by collectivizing the farms. What happened instead was an unmitigated catastrophe that resulted in unprecedented poverty and widespread famine. Estimates range between 15 to 55 million Chinese people died, starving to death in their socialist paradise.

In early 2020 the Ethereum core devs decided that security for the base-layer of the Ethereum protocol would have to move away from Proof-of-Work (mining) to Proof-of-Stake (PoS). This decision is rationalized as an energy efficient, “climate-friendly” way to secure the blockchain.

Ethereum’ s “Great Merge” is borne from similar high-minded aspirations. Proof-of-Stake is ultimately collectivist in nature. Not only that but it is centralized in the sense that staked assets can be appropriated by some authority and “slashed” (seized and burned) if a validator approves a block that is later deemed to be afoul of “the rules”.

The desire to simply confiscate the funds of designated wrongdoers is seductive, but completely short sighted. It’s the same impulse that drives all campaigns of nationalization, expropriation and collectivization. This isn’t working. Why don’t we, the technocrats, suspend the rules, and simply commandeer these resources for ourselves?
— Nic Carter, If Eth Starts Slashing, It Burns.

Those rules… are largely undefined. After the merge happens, nobody with ETH staked will know for sure what the validator nodes they delegated to are ultimately going to do. Anybody who has who staked their ETH by now is already locked in. Even after the merge is complete, there is no timeline for unstaking in place. It could be six to months to a year, according to some reports.

Reason #1: Can Proof-of-Stake be shoe-horned into OFAC compliance?

The Tornado Cash situation is showing us how the new terrain of decentralized  blockchains are a level of abstraction beyond the industrial age regulations like those of the Office of Foreign Assets Control (OFAC). Originally designed to sanction  Specially Designated Nationals and financial institutions, Tornado Cash is now listed as an “entity” under the CYBER2 program.

It isn’t a “Blocked Person” or institution staffed by people, it’s a smart contract. An open source one, at that.

Once Tornado cash (and earlier Blender.io) were sanctioned, huge swaths of the Ethereum ecosystem piled on and started hastily enacting protocol level transaction censorship. It didn’t take long for merry pranksters to demonstrate the futility of this approach by “dusting” wallets of luminaries ranging from Coinbase CEO Brian Armstrong to Shaquille O’Neal with tainted ETH. Have they all violated sanctions now?

Simply remaining on proof-of-work (PoW) … would likely abate the problem. Stake exposes consensus to government will through regulated financial institutions, which are slated to dominate validation, whereas PoW is far more distributed and covert. Switching mining pools is instant and trivial; with PoS, it’s cumbersome. The validator set churns constantly in PoW and there is no hardware bottleneck as Ethereum still uses mostly GPUs.
— Nic Carter, If Eth Starts Slashing, It Burns.

It is worth noting that Bitcoin’s PoW chain has already had a flirtation with these issues. In May 2021, Marathon Digital (NASDAQ: MARA) announced it was the first Bitcoin miner in the world that would be mining only “OFAC compliant” blocks.  There was a loud response to this from within the community outlining the reasons why this was untenable.

MARA proceeded anyway. Less than a week later they scrapped the program and started signalling for Bitcoin’s Taproot upgrade instead.

On its own the uncertainty introduced by OFAC sanctions should at the very least postpone the merge. So far there is no talk of that happening.

Reason #2: Ethereum Hard Fork Risks

Let’s start by saying the preferable way for Ethereum to move from PoW to PoS would have been to do a hard fork. That would have been driven by consensus, free markets and voluntary choice. If Beacon chain is truly a superior, better way to do it, then we would expect the critical mass of users and applications to move there.

Say what you will about Bitcoin Cash, the hard fork that resulted from the Blocksize Wars was exactly the right way to do it. Everybody made up their own mind, nobody was forced onto either chain – participants had the same starting position on each chain, and market forces took it from there.

That’s not what’s happening here. This was decided from on high, and damn the torpedos, it looks like it’s going through. No choice, other than to bounce onto another Layer 1 entirely.

That is unless, there is some manner of rebellion or coup d’état among Ethereum’s miners to run a hard fork of their own. There have been a few rumblings of this.

Where people may hastily conclude that the risk of this happening, and succeeding are small, simply spinning out another Ethereum Classic (ETC) of marginal importance, things could play out differently this time.

I direct to you to two Twitter threads, the first by Miles Suter

1st issue:

ETH miners are contentiously preserving the PoW chain.

Bc DeFi & stables are integral to ETH’s value prop, issuers like USDC essentially select which chain wins & which collapses.

Scary that future forks live or die based on a US company. https://t.co/qUJp7XAG2l

— Miles Suter ? (@milessuter) August 18, 2022

..and the second by Lyn Alden

I’ve seen a lot of people critique proof-of-stake but I’ve not seen many people point out that stablecoin custodians can basically decide the outcome of a hard fork for any blockchain that relies heavily on its DeFi ecosystem for its value proposition. pic.twitter.com/5alHREJsbt

— Lyn Alden (@LynAldenContact) November 29, 2021

…which table the real possibility that in the event of a hard fork that remains on PoW, the decision on which chain actually wins out may be made by some outside entity entirely, like Circle.

Reason #3: What if it doesn’t work?

At a technical level, Ethereum is about to do the equivalent of switching out all the engines on a passenger jet while it’s in mid-flight. Even if they get it right, a large player within the Ethereum ecosystem may get it wrong. If that player is big enough,  it could derail the merge.

In an interview on Bankless, the merge team lead Tim Beiko framed it as a possibility wherein if some large player like Geth (the most widely used Ethereum command line client) messes up, it could impact the system to the point where the Ethereum core devs may have to decide on a hard fork to save the system.

To be clear, he stated he was not worried about Geth in the least, he just used them as an example. It could be any large ecosystem player. I’m not worried about them either, but think: Metamask, Infura, some large Defi or Dex or something hardly any of us have ever heard of but everything uses (the ongoing situation involving the busted eth.link domain is a fitting microcosm here).

The merge itself could go flawlessly and then be derailed by a large ecosystem player having issues.

What To Do About It

Beiko was doing the Ethereum equivalent of Fed jawboning to allay any concerns around the merge. It had the opposite effect for me.

This is not investment advice, but I’m excerpting what I sent to The Crypto Capitalist (our premium letter) on how I’m personally positioning (bracing) for the merge:

• I reduced my own Ethereum exposure, knowing I could miss out on gains if I’m wrong or that ETH can move faster than Bitcoin during an up cycle. I reduced exposure by 70% and added to my stack of Bitcoin (the anchor asset in this space, nothing else compares).
• Real Bitcoin: unwrap any wrapped assets like wBTC (Wrapped Bitcoin) and get it back into its native form before the merge.
• Consider removing any staked, lent, or collateralized assets from any liquidity pools, DeFi applications, yield farms, go back into a non-algorithmic stablecoin, like USDC.
• If you staked any ETH into liquid staking (like Lido or Rocketpool) I’d sell those back into ETH and then do whatever. Reduce into Bitcoin like I did or just leave it in ETH if you think that overall, Ethereum will be fine.

If Ethereum does run ahead of the merge, it has all the makings of a textbook “buy the rumour, sell the news” setup. Even without the aforementioned showstoppers.

From where I’m sitting, the merge to Beacon Chain is almost entirely downside risk, with very marginal upside. To paraphrase Thomas Sowell, “Much of the impetus toward the Ethereum’s move to PoS involves replacing what worked with what sounds good”

I’ve been generally supportive of the Ethereum project from nearly the beginning and my main business has been active in the Ethereum Name Service (ENS) ecosystem since 2017. Gripes aside about gas fees (which won’t be solved by the merge, btw) Ethereum is an ambitious project that provided the rails for DeFi and tokenization which I thought had the potentional to end-run an obsolete banking system.

But this move to Proof-of-Stake seems misguided, taking the wrong path to get to a dubious goal. While Ethereum’s Great Leap Forward won’t result in millions of peasants starving to death, in a worst case scenario it could put about a quarter trillion dollars of wealth at risk or in limbo.