Last week, Vitalik Buterin revealed his thoughts on the political power that centralised stablecoins will have in the future of Ethereum (ETH) for the hard forks to come. As such, we review the implications this could have on future updates to the popular blockchain.
The weight of stablecoins on Ethereum hard forks
As the Merge approaches, discussions about the advent of an Ethereum (ETH) Proof-of-Stake (PoS) blockchain and another Proof-of-Work (PoW) are going strong. In this continuity, Vitalik Buterin raises an issue: the political importance of stablecoins in cases of hard forks.
A hard fork occurs during a major update of the blockchain. So important that it leads to two parallel chains: one with the characteristics before the update and the other with the new parameters.
Generally, when the updates are agreed upon by the different actors, only one chain remains to take the role of the main blockchain. This is what happened with the London update, which integrated the EIP-1559. In other more contentious cases, two chains continue to exist, which for example led to Ethereum Classic (ETC) after the DAO hack.
Vitalik Buterin’s concerns therefore relate to future updates, which could get conflicting opinions. In such scenarios, centralised stablecoin issuers, such as Tether for USDT or Circle for USDC could tip the balance in their favour in future hard forks:
“I think in the more distant future this will definitely become more of a concern. Basically, the fact that the USDC’s decision on which chain to consider as Ethereum could become a deciding factor in future controversial hard forks.”
The fact is that stablecoins are used extensively in decentralised finance (DeFi). This gives them a certain weight on the Ethereum governance stage. This is also why Vitalik Buterin is encouraging the emergence of new stablecoins, in order to dilute these forces.
A point of centralization in a decentralized world
Vitalik Buterin says The Merge shouldn’t cause too much divergence, though he calls on some players not to play opportunistic. This week, Tether publicly expressed support for the move to proof of stake:
USD₮ Supports ETH Proof-of-Stake Transition https://t.co/gMcEYl3aI0
– Tether (@Tether_to) August 9, 2022
The Ethereum founder’s thoughts are actually more on a 5-10 year time horizon. By then, he believes that the Ethereum Foundation may have lost some of its influence to other centralised forces.
The political weight of centralised stablecoins vis-à-vis hard forks stems from their very construction: collateralisation. Indeed, if two chains are born from one and USDT was originally capitalised at $100 billion, we end up with an artificially doubled value, as it is present on two chains.
Now, Tether will have to choose a blockchain that it considers legitimate, to the detriment of another, on which these 100 billion will be worth nothing. This is where a conflict of interest may arise, where such entities could choose in their interest rather than that of the community.
An expert’s view
To better understand the future, it is interesting to study the past. That’s why we asked Ludovic Lars, a cryptocurrency expert who has witnessed contested hard forks like Ethereum Classic or Bitcoin Cash (BCH), for his perspective.
What damage could be done to Ethereum by a split, if there is a disagreement between the different forces involved in the next major updates?
” As with Ethereum Classic and Bitcoin Cash: less damage than one might imagine. Assuming both chains are viable, we would see some companies and merchants following the first chain and the others following the second. There will be the question of branding: what will be the “real” Ethereum? This can be confusing for outsiders and investors. But I think one of the chains would (in this case) end up dominating the other in terms of economic activity, in which case it would take the name Ethereum […]. “
Ludovic Lars also mentions other actors with political power, namely all those who bring utility to the blockchain. These include exchange platforms, liquidity providers and the creators of successful non-fungible token collections (NFTs). Without such players, there is no economy on Ethereum.
However, these players are themselves influenced by other figures:
” […] the Ethereum Foundation (which has to fund certain things), the developers […], the speculators (who drive the price and influence user decisions), the miners/validators (who ensure the security of the chain), the media, the states/regulators in a more diffuse way […]. “
In short, it is a game of negotiations and compromises that everyone must confront in order to advance Ethereum.
For the specific case of Merge, Ludovic reminds us of the fact that many players wanting two viable chains to emerge are only motivated by speculative considerations. Ethereum has long been expected to adopt a PoS model and most stakeholders support this transition. Thus, this is the direction that will be favoured and developed in the long term.
