Why there won’t be a regulated ETH Proof of Work Benchmark

We explain why the ETHPoW hard fork fails to meet strict criteria enabling publication of a regulated benchmark index

ETH has ‘99 problems’, but not The Merge

Ethereum’s transition from the cryptographic/processing power-based Proof of Work (PoW) consensus mechanism that underpinned and secured the blockchain, to a Proof of Stake (PoS) one is holding.

Total Terminal Difficulty (TTD) was achieved on Thursday September 15th, 2022, at 06:42:42 UTC.

Signal disincentivization in place, Ethereum successfully ‘hot swapped’ to the new PoS system—replacing its network of miners with a network of staking ‘validators’—shortly after.

(If still needed, here’s a concise Merge explainer from Kraken.)

Subsequent post-merge price action has followed ‘trader convention’. ‘Sell the news’ prevails. CME CF Ether-Dollar Real Time Index, ETH, the most liquid institutional price, ebbed to as low as $1,220.91 a little under a week post merge, from as high as c. $2,029 on August 14th.

For sure a lot of the pressure has been global macro which has sunk all boats, but, at best, ETH-specific cheer, if any, was ephemeral.

One set of potential consequences that price was spared was ‘The Swerve’: the minority of miners seeking to defend income from cryptographic/processing power, by maintaining a proof of work Ethereum version even after the inception of the PoS blockchain.

Ethereum holders weren’t entirely shielded though.

To distribute, or not to distribute?

There are now competing forked ‘versions’ of Ethereum - separate blockchains, in fact.

The best known is EthereumPoW (ETHW). As widely expected, post fork, prices of ETH forks tanked harder than the foundation token.

ETHW fell 35% within 24 hours and was quoted by Kraken at time of writing as $11.84, compared with almost $24 just after splitting from Ethereum. Volumes are minuscule vs. ETH’s and there may be fewer than two dozen pools mining it.

The bifurcation also triggered the usual ‘forking dilemma’ for exchanges, investment services (like ETFs) and others: ‘to distribute or not to distribute?’

Since ETHW holders are entitled to defined compensations and rights this should apply to anyone who elected to continue owning ETHW that resulted from the ETH fork.

The problem is that typically, decisions on whether to undertake distributions of such rights (AKA ‘airdrops’) are arbitrary.

For instance, exchanges like Binance, FTX, KuCoin, Kraken and others chose to distribute ETHW. Others have been silent.

Among institutional providers, Grayscale, which manages c. $12bn AuM Grayscale Ethereum Trust, said it would probably distribute rights to over 3 million ETH PoW tokens received, with proceeds ultimately remitted to fund holders.

WisdomTree Europe, which strikes indicative NAV of its WisdomTree Ethereum ETP against the regulated CME CF Ether Dollar Reference Rate, said it designated a record date for all of its funds that invest in Ethereum. It aims to enable holders to “receive the benefit of the Forked Ethereum”.

Again though, not all ETH-based funds announced such plans.

Hard policy for hard forks

So, despite large swathes of ETH holders having benefited from distribution so far, disparate policies and haphazard execution fall short of an orderly, fair and reliable marketplace.

For CF Benchmarks, it’s a classic conundrum of the kind that it is our responsibility to address.

Just like all digital asset market possibilities where there’s scope for ambivalence, CF Benchmarks has a tried and trusted set of principles and guidelines.

In this case, the appropriate one is the CF Benchmarks Hard Fork Policy.

It has been in effect since its first iteration in November 2018.

From the outset, the policy determined that fork events can vary in how they impact the ability of a new or existing benchmark to represent the economic reality it purports to.

Therefore, in order to maintain integrity and consistency of application, any broadly defined fork must be examined against a set of materiality criteria:

(From Section 4 – Hard Fork Events, subsection 4.1 – ‘Definition’)

Is it material?

The determination that a fork is material kicks in if after a full 7 days of a token’s existence it has met key criteria for at least 2 consecutive days.

The criteria:

1. The New Token Pair must be available to trade on at least 2 Constituent Exchanges
2. The Token Pair trades at a price greater than or equal to 10% of the combined Price of both the Original Token Pair and the New Token Pair
3. The Trading Volume of the New Token Pair must be greater than or equal to 10% of the combined Trading Volume of the Original Token Pair and the New Token Pair

(From – Section 4.2 ‘Material Hard Fork and Resultant New Token Determination Criteria’)

The outcome:

1. As of late-September, only one CME CF Constituent Exchange currently offers ETHW, Kraken
2. ETHW was quoted at $11.88 at the time of writing. CME CF Ether Dollar Reference Rate printed at $1,598.85 on September 14
3. Based on the ETHW project’s self-reported circulating supply, ETHW dollar volume was estimated at just ~$188.8m at time of writing, vs. ETH’s approximate $13.8bn.

In accordance with CF Benchmarks’ Hard Fork Policy then, ETHW’s hard fork is not material.

This means that no ETHW benchmark will be published.

This has serious consequences for ETHW.

• Market prices of ETH PoW won’t be subject to the safeguards of market integrity, reliability and replicability that a regulated Registered Benchmark is possessed of
• There is no reliable yardstick (benchmark) for validating the value of any ETHW distribution

More positively, the failure of ETHW to meet rules-based materiality criteria is further evidence of the robustness and inviolability of our Benchmark Methodology.

This points to continuing benefits and protections for all cryptoasset investors given that major blockchain events like The Merge are likely to become far more frequent over time.

Additional Resources

• Read the Quarterly Attribution Analysis for our CF Diversified Large Cap Index by CF Benchmarks Lead Research Analyst Gabe Selby, CFA, to learn how pre Merge positioning impacted the broader crypto market.
• Find out more about the most liquid institutional Ether regulated benchmarks: CME CF Ether-Dollar Reference Rate and CME CF Ether-Dollar Real Time Index
• Read or download the CF Benchmarks Hard Fork Policy.