Most interested observers are by now aware of Ethereum's (ETH 1.01%) upcoming Merge event, in which the second-largest crypto by market cap will make its long-awaited transition from a proof-of-work consensus mechanism to proof of stake. As enthusiasm for the Merge has grown, Ethereum has staged a furious comeback this summer, rallying 90% since its cycle low of $897.06 on June 18th.
The move stands to be a major net positive for the Ethereum network, but another cryptocurrency adjacent to the Ethereum ecosystem is already benefiting from the impending switch and has surprisingly outperformed Ethereum, rallying more than 190% since its low on the same date.
Let's take a look at Ethereum Classic (ETC 1.33%). Why is this Ethereum alternative rallying, and what lies ahead for the 19th largest cryptocurrency by market cap?
What is the Merge anyway?
The Merge, the move to proof of stake, is expected to take place between Sept. 15 and 16, and observers believe it will bring about several major positives for the Ethereum network. Ethereum will become less energy intensive, and analysts from Citigroup forecast that Ethereum will consume 99% less power after the transition. Ethereum will also be more decentralized, and more users will be able to earn rewards for participating in the Ethereum network by staking their Ethereum.
Perhaps most notably for investors, Citigroup analysts say that Ethereum issuance will decrease by 4.2% per year, and that it will eventually transform from an inflationary asset to one that is deflationary, reducing the growth in supply and bolstering its standing as a store of value.
These are all net positives, but not everyone is enthusiastic about it, especially when it comes to one particular group of Ethereum participants.
Enter Ethereum Classic
Most crypto mining activity is directed at Bitcoin, the largest proof of work cryptocurrency (and largest cryptocurrency overall). But Ethereum also generates a significant amount of mining activity. Mining new blocks of Ethereum is a lucrative activity, and data shows that Ethereum miners collectively generated $24 million in daily revenue.
But as Ethereum transitions to proof of stake, this activity will grind to a halt and no longer be possible. Mining equipment is expensive and custom built for mining cryptocurrency, leaving Ethereum miners with costly equipment that can't be used for much else.
Enter Ethereum Classic. Ethereum Classic started as a fork of Ethereum in 2016 following the Ethereum DAO hack. Like Bitcoin, Ethereum Classic has a capped supply -- in Ethereum Classic's case, this number is 210.7 million ether classic coins, or ETC.
While it is associated with Ethereum, it is a totally separate blockchain that is independent from Ethereum, and it will remain proof of work. Data show an increase of hash rate (a measure of computational power) for Ethereum Classic, which is hitting an all-time high and seems to indicate that some Ethereum miners are already migrating to the Ethereum fork. Analysts from JPMorgan speculate that investors may also be buying ETC as a "hedge against any potential disruptions in the Ethereum blockchain during the shift from Proof of Work to Proof of Stake," according to CoinDesk.
Plight of the miners
Some prominent figures in the crypto world like Tron founder Justin Sun and Chandler Guo, one of the key figures behind the original fork of Ethereum Classic, want to resist the Merge by creating a new proof of work Ethereum called "ETHW" or "ETHPoW." However, it stands to reason that Ethereum Classic would be a bigger beneficiary, as it already has considerable infrastructure and ecosystem in place, not to mention a market cap of $5.1 billion. The theoretical ETHW would need to build up this same value from scratch.
To Guo's credit, he is open about the fact that ETHPoW is likely a long shot, stating that "There is still a 90% chance that this will not succeed....Forking ETHW will not be as easy as forking ETHC." Guo sympathizes with miners who he feels have been abandoned by the shift to proof of work and who say they will never be able to recoup the money that they invested into mining equipment.
On the other hand, Antpool, which is backed by China's mining equipment manufacturer Bitmain and operates large Bitcoin and Ethereum mining pools, recently pledged $10 million in investment to drive development of new projects on the Ethereum Classic network. Even Ethereum co-founder Vitalik Buterin seems to have given Ethereum Classic his blessing, stating that "the original Ethereum" and that Ethereum users who like proof of work "should use Ethereum Classic."
Is Ethereum Classic worth a try?
Ultimately, I am personally excited about the Merge and bullish on Ethereum, which I hold. I don't mind the idea of risk-tolerant inventors also holding some Ethereum Classic to see what develops there now that a large contingent of network participants with significant resources behind them have a vested interest in seeing this smaller Ethereum offshoot succeed in the wake of the Merge.
That being said, this is likely a speculative investment at most. Mining for Ethereum Classic is currently much less profitable than mining Ethereum, with miners collectively generating about $700,000 a day in revenue, and this revenue potentially will be split between even more parties as more miners migrate to Ethereum Classic. Furthermore, the Ethereum Classic network hasn't shown much growth in terms of transaction volume since 2018 and has few users compared to other top cryptocurrencies by market cap. So the ultimate long-term potential for upside here may ultimately be limited once things settle down after the Merge.