Ethereum Merge reminding me of COVID lockdowns

Ugh. Not a good couple of weeks for Ethereum investors, as the DeFi King has dipped down below $1700, now trading 55% below its open of $3722 back on New Year’s Day.

BTC Dominates

Of further concern for fans of Vitalik’s creation will be the underperformance against Bitcoin over the last month or so. While the market as a whole has plummeted amid the macro sentiment and fallout from the Terra circus, there have at least been small relief rallies over the last few days for Bitcoin. Ethereum, on the other hand, has been pretty much constantly dropping.

The chart below shows it performance against Bitcoin. ETH strongly outperformed BTC through 2020 and 2021, as the bull market raged and ETH leveraged its higher volatility and smaller market cap. However, as the market has turned this year, we have seen BTC re-assert its dominance over all things crypto, as has historically been the case in pullback periods.

Additional Problems

Digging into the fundamentals here throws up factors for ETH’s decline beyond simply the bloodbath taking place across the board. That is the fabled Merge, which has been promised, postponed and re-promised for as long as crypto enthusiasts can remember. At this point, the Merge triggers traumatic memories in my mind of lockdown back home in Ireland.

I think we had five lockdowns total, ranging from three weeks to 6 months long. Each one brought promises that it was the last, but they simply kept on coming, thick and fast. 8 PM curfews, 2KM perimeters around one’s house, exercise quotas and more, it was a constant kick-the-can-down-the-road exercise as our government repeatedly fell short of its own targets and failed to plan accordingly.

While the ETH Merge is still seemingly slated for August, last week was a reminder that it is far from set in stone, as it hit a stumbling block when the Beacon Chain went through a seven-block reorganisation (or reorg) last week.  To be exact, seven blocks from number 3,887,075 to 3,887,081 were knocked out of the Beacon Chain between 08:55:23 and 08:56:35 AM UTC.

To translate this into non-computer whizz speak, a reorg is the name given to an event when a block that was part of the main chain (the canonical chain) gets knocked off due to a competing block beating it out. Typically, this can occur via either a malicious attack or a bug.

The Ethereum beacon chain experienced a 7-block deep reorg ~2.5h ago. This shows that the current attestation strategy of nodes should be reconsidered to hopefully result in a more stable chain! (proposals already exist) pic.twitter.com/BkQrKuUlw1

— Martin Köppelmann (@koeppelmann) May 25, 2022

Ethereum developer Preston Van Loon suggested that in this instance it happened due to a “non-trivial segmentation” of new and old client node software, ruling out any malice. Ethereum co-founder Vitalik Buterin declared his theory a “good hypothesis.”

This, unfortunately, shows that the analysis by @gakonst and @VitalikButerin here was too optimistic when the article claimed re-org stability will improve in POS over POW.

We have not seen 7 block reorgs on Ethereum mainnet in years.https://t.co/G5g8acG3L8 pic.twitter.com/AvZ6ygZRxs

— Martin Köppelmann (@koeppelmann) May 25, 2022

My Thoughts

This is a hiccup but nothing to be concerned about in the long-term. However, it certainly hammered home how tenuous the slated August timeline. While many have long since given up on predicting the timing of this elusive overhaul, the enormity and scale of the project has certainly been underestimated by the cryptocurrency community.

The latest dip in Ethereum – it wobbled significantly last week while Bitcoin trudged along just fine – can likely be attributed to this extra doubt over the roadmap. With the upgrade largely priced in for August, and the market uber-sensitive right now as investors simply try to survive, news like this will always trigger selling.

With sentiment worse in the wider market than at any point post the GFC, and cryptocurrency facing all sorts of difficult questions in the aftermath of the Terra implosion, the space simply needs Ethereum to hold up its end of the bargain and pull through with a successful Merge.

I believe we are still on course for that in August – with the Ropsten testnet merge providing some good news earlier today, one of the deciding events before application to the mainnet. But then again, I believed lockdown would last three weeks, and I ended up spending so much time in my bedroom over the last two years that I forgot what the sky looked like.

Let’s hope I’m not repeating my past mistakes here.