Ethereum developers have activated the Bellatrix upgrade, the final step before the core network moves to the Proof-of-Stake (PoS) consensus algorithm as part of The Merge upgrade scheduled for next week. According to developers and Ethereum Foundation representatives, the process is right on track and gives no reason to worry, however, the long-awaited upgrade may be accompanied by a period of turbulence, and the cost of a mistake may be too high.

On September 6, the Bellatrix upgrade was launched in the Beacon Chain, a parallel running PoS chain, where future validators have already placed coins that will keep Ethereum running after the Merge. Ethereum developers will be watching closely to see how smoothly the upgrade goes. If all goes according to plan and Bellatrix works as expected, it is likely that the transition of the core network to PoS will happen in mid-September, just as Vitalik Buterin predicted.

According to Vladislav Utushkin, founder of the TOTHEMOON group of companies, the team is testing the system and making the transition gradually, in small steps. “The chance of bugs and errors is low. However, we should not forget about the black swans. Anything can happen, even things that we do not expect in any way,” the expert comments.

Indeed, after the activation of Bellatrix, there were some technical problems. There was a noticeable jump in the number of missed blocks in the Ethereum network. The missed block rate reflects the frequency with which the network is unable to process blocks for confirmation. Prior to the Bellatrix upgrade, this rate did not exceed 0,5%, but after its launch, more than 9% of all blocks on the network faced the problem.

This could be due to the fact that not all Ethereum node operators had upgraded their software. According to instructions from the Ethereum Foundation, if a node runs on incompatible software with Merge, its operator risks being “stuck on an incompatible chain following the old rules” and not being able to conduct transactions once the network finally moves to PoS. In other words, the fewer node operators upgrade software, the more unconfirmed blocks there will be in the PoS version of the blockchain. However, the worst-case scenario appears to have been avoided: according to Ethernodes, more than 74% of the network's nodes are ready for the upgrade, which is already enough to process transactions correctly.

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“Of course, no one is safe from mistakes. But the upcoming upgrade is an intermediate result of a long and difficult path that began several years ago and has already been successfully tested on testnets,” commented blockchain consultant Denis Smirnov, adding that while this is not a guarantee that everything will necessarily go perfectly, it allows a high degree of probability to expect that the transition will be as painless as possible. “The stakes are pretty high right now. Ethereum is no longer just a “world computer,” it is home to a huge ecosystem of decentralized finance, and any problems can threaten not only the platform itself, but also countless projects deployed on it,” Smirnov explains.

Unofficial copies

Speaking of deployed projects, their users and token holders may face risks and confusion when forking the network, which is left to work on the Proof-of-Work (PoW) algorithm, beneficial to miners. Support for Ethereum's PoW token has already been announced by cryptocurrency exchanges, promising to accrue it to “original” ETH holders in a 1:1 ratio. Many people in the community began borrowing ETH coins in DeFi-protocols, planning to get even more tokens on distribution, after which some lending projects suspended lending in order to reduce the risk of rising rates.

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The widespread information campaign around Ethereum's PoW fork carries other risks as well. Any assets that exist on the network will also be duplicated in its offshoot if the fork takes place and gains user traction. This potentially opens up opportunities for attackers and so-called “replication attacks” where a transaction in the PoW fork blockchain is passed off as a transaction in the main network. Copies of the NFTs will exist in both chains, and there could be confusion about which ones are “official” when sold.

If the asset copies are given any value whatsoever, inexperienced buyers risk being left with tokens that won't be supported by the leading services and will be devalued. “Most likely, we will get a marginal network in which a huge portion of assets will be unsecured in the blink of an eye,” Smirnov predicts. The situation with assets in the PoW-fork blockchain, according to the expert, “will resemble a mad charade with incredible volatility.”

According to Utushkin, there is currently no step-by-step algorithm for dealing with asset copies, and any unnecessary steps could lead to losses. “However, what is worth doing for sure is to transfer assets to the original network and cancel all interactions (for example, betting on Opensea),” the expert advises.

It is logical to assume that in the long term the future of the “unofficial” version of Ethereum is unclear. Support for leading projects and developers will remain on the side of the main network, and, respectively, assets on it will retain their value. Miners, on the other hand, are likely to switch their equipment capacity to other PoW coins, as already evidenced by the rising price and computing power of Ethereum Classic (ETC). “My strategy for these fork tokens is to sell them all immediately,” CoinGecko co-founder Bobby Ong wrote on Twitter. According to him, almost all forks are dead and were created “solely to keep miners temporarily occupied with mining” without any incentives to use and develop the community.

What will happen to the price

According to Ong, in the run-up to The Merge, markets will be “volatile, messy and complex.” He admits ETH will rise just before The Merge upgrade and fall immediately after its activation.

According to Utushkin, “two camps are forming.” One side is confident that ETH will collapse. Supporters of this opinion, according to the expert, “root for the true decentralization,” possible only with the PoW algorithm. Others suggest that ETH will rise after the upgrade “because they root for PoS.” “One thing we can be sure of is that ETH will grow in the long run,” concludes the TOTHEMOON representative.

One should not expect any serious fluctuations in the price of Ether immediately at the time of the upgrade, says Smirnov, citing the fact that many centralized exchanges have suspended trading in ETH coins, and large owners will prefer not to take risks and not carry out transactions on the network until the completion of Ethereum's transition to PoS.

“As for the value of ETH after the successful upgrade, it should take a positive view of the change. The transition to PoS paves the way for further protocol improvements, such as sharding, which will increase network throughput to hundreds of thousands of transactions per second,” the expert predicts. With the introduction of PoS, the issuance model of ETH will change, making the coin deflationary. This means that more tokens will be burned than are produced during blockchain validation. According to Smirnov, this should also have a positive effect on the value.