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To holders of all Ethereum-related bridged assets supported by Sovryn, in particular holders of eSOV, ETHs, and XUSD, we want to share information about how the upcoming Ethereum event known as “The Merge” may affect you. If you aren’t interested in the historical or technical details, feel free to jump ahead to the “conclusion” section to find out what you need to do to prepare for The Merge.
The Merge is Ethereum’s long-planned transition from using proof-of-work to secure proof-of-stake to secure the blockchain. The Merge is estimated to occur on September 15th, and after multiple rounds of testing it is expected to occur without issue.
There is a possibility that some Ethereum proof-of-work miners hard fork Ethereum to maintain support for proof-of-work even after The Merge. This would cause a chain split at the same block height that The Merge activates. Depending on the implementation details of the hard fork, this could create a new “split-chain” (let’s call it “Ethereum-PoW” for short) that shares the same history as Ethereum up to the point of The Merge, when the proof-of-work and proof-of-stake chain consensus rules and blockchain histories will diverge.
If this chain split occurs, then users who hold assets on the Ethereum chain at the time of the split will end up holding equal amounts of the “same” asset on both Ethereum and Ethereum-PoW. So if you are holding 1 ETH in your own Ethereum address at the time of The Merge, and this chain split occurs, then post-Merge you will be holding 1 ETH on the Ethereum chain and 1 ETH-PoW on the Ethereum-PoW chain.
In this hypothetical chain split scenario, a problem obviously arises for issuers of Ethereum-based assets that are backed by collateral that is held offchain,such as eSOV (which is backed by SOV on Rootstock) and fiat-backed stablecoins (which are backed by assets held by centralized financial institutions). For example, after the chain split, a user who was holding 1 eSOV on Ethereum at the time of The Merge will also be holding 1 eSOV-PoW on Ethereum-PoW. In effect, the supply of eSOV has doubled. However, the amount of SOV on Rootstock has not doubled. So developers of the Sovryn Bridge, which issues and redeems eSOV, will then have to make a choice: which version of eSOV does the bridge actually accept when people want to redeem their eSOV for SOV?
Issuers of fiat-backed stablecoins have anticipated this hypothetical chain split scenario and have already begun making statements about what they would do if a chain split were to occur at the time of The Merge. Circle, one of the issuers of USDC, and Tether, the issuer of USDT, have made nearly identical public statements here and here, respectively, where they both say:
“While we do not speculate on the possibility of forks connected to the Ethereum Mainnet merge, tether token as an Ethereum asset can only exist as a single valid ‘version,’ and as stated previously, our plan is to solely support the upgraded Ethereum POS chain.”
So in the hypothetical scenario where there is a chain split at the time of The Merge and there exists both USDC and USDT on Ethereum and USDC-PoW and USDT-PoW on Ethereum-PoW, only the USDC and USDT on Ethereum will have any value. The issuers of these assets have already made this decision. Because about 70% of the collateral that backs MakerDAO’s DAI stablecoin is backed by offchain assets including fiat stablecoins such as USDC, DAI would become almost completely worthless as well. So far that accounts for all of the stablecoins supported by the Sovryn bridge and the XUSD aggregator.
The situation for holders of ETH on Ethereum is different. Because ETH is not backed by any offchain collateral, there are no extrinsic centralized entities that could force either ETH or ETH-PoW to completely lose monetary value in a hypothetical chain split scenario. Similar to how ETC continued to have monetary value after the Ethereum Classic chain split from Ethereum in 2016, ETH-PoW could continue to have value if Ethereum-PoW splits from Ethereum at the time of The Merge.
ETH that is held in the Sovryn Bridge, however, would be subject to similar limitations as assets that are backed with offchain assets. This is because, from the perspective of the Ethereum and Ethereum-PoW blockchains in a hypothetical chain split scenario, a bridged asset like ETHs on Rootstock is an “offchain asset”. While the supply of ETH would effectively double if there is a chain split, the supply of ETHs on Rootstock would remain the same. This means that as-is, the Sovryn Bridge cannot support redeeming ETHs for both ETH and ETH-PoW in the event of a chain split.
Theoretically, the Sovryn Bridge developers could “airdrop” ETHs-PoW on a 1:1 basis to everyone who holds ETHs at the time of the chain split and implement a bridge feature supporting the redemption of ETHs-PoW on Rootstock for ETH-PoW on Ethereum-PoW. However, there are several factors that complicate such an implementation: there is a short runway until the estimated time of The Merge; many services would be nonfunctional or highly degraded on the hypothetical Ethereum-PoW chain, making the value of ETH-PoW highly uncertain; if there are multiple split-chains in addition to the “official” Ethereum chain at the time of The Merge, it will be difficult to decide which to support; developers of other bridges such as the Rainbow Bridge have publicly stated they will not support a hypothetical Ethereum-PoW chain; and there is currently not that much ETH in the Sovryn Bridge (7 ETHes from Ethereum and 1739 ETHbs from BSC). All of these factors make it hard for the Sovryn Bridge developers to justify the effort needed to support a hypothetical Ethereum-PoW chain.
Statement regarding The Merge
Sovryn Bridge developers have decided that after The Merge, the Sovryn Bridge will exclusively support the proof-of-stake Ethereum chain as defined in the Paris protocol specification. Only holders of eSOV on the proof-of-stake Ethereum chain will be able to transfer their eSOV back to Rootstock using the Sovryn Bridge, and holders of Ethereum-based bridged assets on Rootstock will only be able to transfer their assets back to the Ethereum proof-of-stake chain.
Sovryn Bridge infrastructure has been updated to remain in sync with the rest of the Ethereum network after The Merge. The Sovryn Bridge will continue functioning on both Ethereum and Rootstock after The Merge, and all supported assets will be fully transferable both ways as usual, with no issues expected.
If you do not expect a chain split to occur, or you do not care about being able to claim assets on any split-chains if a chain split does occur, then you do not need to do anything and can continue using the Sovryn Bridge as usual. Since all other parts of the Sovryn protocol run on the Rootstock blockchain, we do not expect The Merge to affect the operations of any other aspects of the Sovryn protocol, either.
If you hold ETHs or XUSD and want to be able to “claim” assets on both the Ethereum chain and the Ethereum-PoW chain in the event of a chain split at the time of The Merge, you will need to use the Sovryn Bridge to transfer your assets back to your own Ethereum address that you control the private keys to before The Merge occurs on approximately September 15th. If there is no liquidity for transferring your assets to Ethereum using Sovryn Bridge, then you will need to transfer to BSC and then find a bridge from BSC to Ethereum. Just make sure you eventually have the assets in your own Ethereum address at the time of The Merge so you can “claim” your assets on both chains if this hypothetical chain split occurs.