Just-In: Coinbase Highlights Four Potential Risks Of Ethereum Merge

Ethereum is to undergo a transition from proof-of-work (PoW) to proof-of-stake (PoS) with the Merge on September 15. Now, Coinbase has come up with four risks regarding the Ethereum Merge ahead of the most anticipated upgrade in the history of crypto.

Coinbase Cloud Outlines Risks Associated with the Merge

Ethereum Merge is now just around the corner as Ethereum developers and clients push for the merger of Ethereum Mainnet with the Beacon Chain on September 15. Also, the Merge progress is now 99.76% complete.

However, Coinbase Cloud has outlined potential risks linked to the Merge. These include technical, operational, economic, and lack of client diversity risks.

Technical Risk: As the Merge is the most anticipated and technically complex upgrade yet in crypto, the chances of bugs and technical glitches are higher. Moreover, it involves the merger of two blockchains, execution layer Ethereum Mainnet (PoW) and consensus layer Beacon Chain (PoS), which is completely different from a hard fork.

Recently, execution layer clients Go Ethereum (geth) and Nethermind disclosed bugs in their upgrade. Almost all clients have experienced issues with the release. However, fixes have also been announced lately. Moreover, developers have also released key warnings related to running and upgrading clients’ releases.

Operational Risk: The participation from validators and node operators dropped after the Bellatrix hard fork as some failed to upgrade their clients. There are multiple things happening behind, including client releases, testnets, last-minute client releases, etc.

Recently, developers announced that nearly 25-30% of validators went offline after the Sepolia upgrade due to configuration issues. The Merge is already here, but only 85% of nodes have upgraded to the latest client releases.

Economic Risk: The PoS transition will make miners obsolete as validators will be responsible for block production. Moreover, Ethereum miners use GPUs, which can’t be used for Bitcoin mining. Thus, miners may have to switch to other available mining tokens.

Ethereum PoW fork may cause some critical issues with dApp, DeFi platforms, and other systems. Especially, high utilization of ETH on borrowing and lending protocols such as Aave, and replay attacks are the main concerns.

Lack of Client Diversity Risk: A lack of client diversity increases the risk of a consensus client becoming dominant among other clients. The client may violate consensus and proposes blocks validation on its own terms. Currently, Prysm has around a 44% stake, while Lighthouse has 34%.

Ethereum Price Deflationary After the Merge

Ethereum’s transition to PoS will also make ETH price deflationary due to the EIP-1559 burning mechanism. However, deflationary prices will mostly depend on gas fees and validators.

The Ethereum price is trading above the psychological level of $1500. However, any risk may cause the price to drop below the level. At the time of writing, the ETH price is trading at $1,625.