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Stablecoin giants Circle, Tether back Ethereum’s ‘merge’—a bad sign for those pushing a hard fork

August 9, 2022, 9:41 PM UTC
Illustration by Fortune

Issuers of the most popular stablecoins—cryptocurrencies pegged to a pool of reserves like the U.S. dollar—came forward on Tuesday in support of the Ethereum “merge.” 

The merge is a highly anticipated upgrade that will shift Ethereum from a so-called proof-of-work consensus model to a proof-of-stake one, and dramatically reduce its environmental impact. 

Circle, the creator of top stablecoin USD Coin (USDC), wrote in a blog post today that it “intends to fully and solely support” the Ethereum proof-of-stake chain post-merge. 

Soon after, Tether, the entity behind another popular stablecoin USDT, also published a blog post titled “USDT Supports ETH Proof-of-Stake Transition,” detailing how Tether hopes the merge will not be “weaponized to cause confusion and harm” for the Ethereum ecosystem, its applications, and investors. 

This comes after some Ethereum miners shared a collective interest in attempting a hard fork, or a blockchain split of sorts, post-merge, since miners have something to lose after Ethereum shifts to proof-of-stake: their income. 

Currently, with proof of work, Ethereum miners expend electricity to validate transactions on the network and, in turn, earn token rewards. To do this, miners have also invested thousands of dollars in buying necessary equipment and computer power, betting a lot on the proof-of-work model. With proof of stake, Ethereum will rely on a trusted network of validators to process transactions instead, effectively eliminating the need for miners.

Though miners might try to continue Ethereum’s proof-of-work chain for this reason, their success is very unlikely—especially now that major stablecoin providers are signaling their support for the merge. 

Getting the likes of Circle and Tether to support the proof-of-stake chain is critical for the merge’s success since, if a fork happens post-merge, projects will have to determine which chain—proof of stake or miners’ proof of work—retains value. Since stablecoins are vital for most of the decentralized finance (DeFi) applications that live on Ethereum, how projects assign value is extremely important, and will offer insight into which chain will last. 

Along with stablecoin providers, an endorsement from cryptocurrency exchanges and other big projects could hold a lot of weight for either chain, which is why the Ethereum community could view support from Circle and Tether as an important step for proof-of-stake adoption, even if a fork happens.

Ethereum creator Vitalik Buterin acknowledged this on Friday during a press meeting, noting that “if a proof-of-work fork becomes large, then there’s definitely a lot of applications that will have to choose one way or the other.”

However, Buterin expressed that he isn’t worried about a fork hurting Ethereum and its merge, adding that most major applications have shown support for proof of stake, and those pushing for a fork are just “a couple of outsiders that basically have exchanges, and most just want to make a quick buck,” he said. 

Similarly, most within the crypto community have agreed online.

“No one in the ETH community apart from miners want to stay on proof of work,” the Flashbots strategy lead and research collaborator at Paradigm known as Hasu tweeted over the weekend. “This fork chain will be a giant retail trap. Miners, exchanges, traders are all trying to talk it up for their own self-interested reasons.”

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