For cryptocurrency enthusiasts, a hard fork is potentially exciting news — and the upcoming Ethereum Merge (also called Ethereum 2.0, or simply “the Merge”) could prompt one of the largest forks in recent memory.
In September 2022, the Ethereum blockchain is expected to transition from Proof-of-Work (PoW) to Proof-of-Stake (PoW), which may make the blockchain more flexible and capable of handling more transactions. It’s also expected to improve energy efficiency — a significant concern, since PoW crypto exchanges require an enormous amount of electricity to operate.
We’ve written a detailed synopsis of the Ethereum merge here, which outlines the upcoming transition and its potential effect on Ether’s value.
However, for investors, there’s another important consideration to keep in mind: If a significant number of Ethereum users decide to stick with the PoW model, the world’s second-largest cryptocurrency could split (or fork) into two separate blockchains. Here’s what that could mean.
What is a hard fork, and why does it matter?
In a hard fork, a blockchain is duplicated. Every transaction prior to the fork is the same on both blockchains.
A hard fork doesn’t mean that you’ve doubled your money. The value of cryptocurrency is set by the market, not by the foundations and user groups that control the protocols.
A potential Ethereum fork would only double the value of your assets if both of the resulting coins had the same amount of value, and historically, this has never been the case.
And while holding coins during a fork could result in gains, it could also harm public perception of the original crypto (in this case, Ether), resulting in a net loss in value.
The DAO Hack and Ethereum’s Most Significant Hard Fork
For long-term Ethereum advocates, forking is nothing new. In 2016, an insecure contract drained the network of over 3.6 million Ether (ETH), compromising the DAO tokens of thousands of users.
The Ethereum community voted to fork the blockchain, which allowed victims to recover their lost tokens — but the move was controversial. Some miners noted that the DAO hack was not a problem with the Ethereum protocol and argued that the fork was unnecessary. By “reversing history,” Ethereum was setting a precedent that could destabilize its value as a cryptocurrency.
That controversy resulted in the most significant hard fork in Ethereum’s history. Most Ethereum users followed the community vote and used the new blockchain (the one that “rewrote history” by wiping out the DAO hack). However, some miners kept using the old blockchain, which was renamed Ethereum Classic.
Today, Ethereum Classic (ETC) has a value of around $32.89, a far cry from ETH’s current value of $1,584. But since ETC has some value, many holders benefited. If you held ETH prior to the fork, you received the same amount of ETC — essentially, free cryptocurrency.
Some Ethereum users are insisting on the proof-of-work model.
Many of those users have ethical intentions: They claim that since proof-of-stake is less of a proven methodology, it may create security risks that compromise the ETH network. PoW may also make ETH more centralized, which is bad news for crypto purists.
Prominent advocates of a PoW fork include Justin Sun, an entrepreneur and the founder of the TRON blockchain DAO ecosystem, and Chandler Guo, a prominent Chinese Ethereum miner.
Currently, the plan is to split ETH to EthereumPoW (ETHW), provided that the new network gets enough attention to justify the split. Several cryptocurrency exchanges have also announced support for a potential PoW version of Ether and have pledged to automatically deliver any forked tokens to their users.
But supporters of PoS Ethereum note that earlier forks didn’t result in competitive blockchains — particularly Ethereum Classic, which likely had much more consensus support than ETHW.
Preparing for the ETH Merge (and Potential Hard Forks)
Needless to say, if you can’t access your ETH, you won’t see benefits from the Merge or any other developments in the blockchain.
If you need to recover Ether, we’re here to help. Datarecovery.com’s cryptocurrency recovery experts can repair damaged media, recover lost passwords, and restore ETH or other tokens to your wallet.
Talk to us to discuss your options. Call 1-800-237-4200 or click here to submit a case online.