Stablecoins

There were vast discrepancies in crypto markets during Q3: Report

The total crypto market cap actually increased in Q3 following a series of devastating sell-offs earlier this year.

According to a new report published by cryptocurrency data aggregator CoinGecko, several interesting anomalies surfaced in cryptocurrency markets during the third quarter. Although the digital asset industry witnessed heavy sell-offs earlier this year, its overall market cap increased by around $100 billion compared to Q2.

While in the past, crypto bear markets have largely decoupled from stock performance, coins and tokens traded almost in exact tandem with the U.S. S&P 500 Index in Q3. The correlation coefficient, which ranges between 0 and 1, for the performance of the S&P 500 versus cryptocurrencies stood at 0.85 in the said time period. 

Additionally, even though Bitcoin’s value saw a 1% drop during Q3, it actually outperformed every single asset class aside from the U.S. dollar Index, which measures the exchange rate of a basket of foreign currencies compared to the U.S. dollar. During times of economic uncertainty, investors worldwide typically flood to safe-haven assets such as the U.S. dollar and the Swiss franc. However, stablecoins, which are mostly pegged to the U.S. dollar, saw their circulation plummet by $4.7 billion in Q3.

One factor behind the plunge appears to be that of the OFAC’s sanction on cryptocurrency mixer Tornado Cash which made it a criminal offense for U.S.-based stablecoin issuers and users to interact with the service. 

Thirdly, total market capitalization in decentralized finance, or DeFi, applications increased by 31.3% quarter-over-quarter to $24.5 billion. There was a system-wide rebound across all verticals except in the realm of asset management. This did not come as a surprise, as a few months prior, the implosion of centralized finance firms interacting with DeFi applications, such as Celsius and Three Arrows Capital, ignited a widespread bear market. 

Finally, the total trading volume of nonfungible tokens, or NFTs, saw a 77.4% quarterly plunge from Q2 to Q3. At the same time, the number of wallets that ever owned an NFT increased by a staggering 1 million in Q3. Some in the crypto community have recently started to call the bottom of the market turmoil. 

IRS introduces broader ‘Digital Assets’ category ahead of 2022 tax year

An early draft of the 2022 IRS tax form sees cryptocurrencies, stablecoins and nonfungible tokens grouped under a new “Digital Asset” category.

American taxpayers will find a broader, more defined category encompassing cryptocurrencies and nonfungible tokens (NFTs) in their 2022 IRS tax forms. The draft bill released by the Internal Revenue Service features a well-defined Digital Assets section that outlines if and how taxpayers will account for the use of cryptocurrencies, stablecoins and NFTs.

Page 16 of the draft defines Digital Assets as any digital representations of the value recorded on a “cryptographically secured distributed ledger or any similar technology.” 2021’s tax form required taxpayers to indicate whether they had received, sold or exchanged in “virtual currency” — with this term changing in the yet-to-issued 1040 tax form for 2022.

Taxpayers are required to answer the Digital Assets section of their income tax return whether or not they have engaged in digital asset transactions during the tax year.

A number of situations will require American taxpayers to indicate yes to the question on Digital Assets of Form 1040 or 1040-SR. This includes receiving as a reward, award or payment for property or services or sold, exchanged, gifted or disposed of a digital asset in 2022.

Related: IRS to summon users who don’t report and pay tax on crypto transactions

This would include instances where an individual received digital assets as payment for property or services provided or as a result of a reward or award. Receiving new digital assets through mining or staking also falls under this category, as does transacting digital assets in exchange for goods or services as well as exchanging or trading digital assets.

Holding cryptocurrencies, stablecoins or NFTs as well as staking tokens is also clearly addressed in the draft tax form:

“You have a financial interest in a digital asset if you are the owner of record of a digital asset, or have an ownership stake in an account that holds one or more digital assets, including the rights and obligations to acquire a financial interest, or you own a wallet that holds digital assets.”

The Digital Assets explainer also outlined conditions that do not require taxpayers to check Yes on their tax forms. If an individual holds a digital asset in a wallet or account, transfers digital assets from a wallet or account to another wallet or account owned by themselves or acquires digital assets using United States dollars or other fiat currencies through electronic platforms like PayPal.

Digital asset transactions can be clearly classed in either capital gains or income sections of the 2022 tax return.

If an individual disposed of any digital asset during the year which was held as a capital asset, they are expected to calculate their capital gain or loss and report on Schedule D of the tax return.

If individuals received digital assets as payment for services or sold digital assets to customers in a trade or business, this would need to be reported as income in its specific category.

Many crypto asset activities pose ‘novel risks‘ to banks, says Fed vice chair for supervision

Michael Barr suggested that financial institutions engage with U.S. regulators to ensure “safe, sound, and legally permissible” activities regarding the use cases of innovative technologies.

Michael Barr, the vice chair for supervision for the United States Federal Reserve, warned banks of the potential risks of crypto-related activities, suggesting crypto service providers be subject to similar regulations as traditional financial institutions. 

In written remarks prepared for an Oct. 12 speech at D.C. Fintech Week, Barr seemed to encourage banks to explore issuing tokens on distributed ledger networks, but “only in a controlled and limited manner.” The Fed vice chair for supervision suggested that financial institutions engage with U.S. regulators to ensure “safe, sound, and legally permissible” activities regarding the use cases of innovative technologies like crypto and stablecoins.

“The [Fed] is working with our colleagues at the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to ensure that crypto-asset-related activities banks may become involved in are well regulated and supervised, to protect both customers and the financial system,” said Barr. “Many of these activities pose novel risks, and it is important for banks to ensure that any crypto-asset-related activities they conduct are legally permissible and that banks have appropriate measures in place to manage those risks.”

Barr added that the Fed was “working with other regulatory agencies” on a framework for stablecoins, claiming they were more likely to “grow into money substitutes and become a viable means to pay for transactions” as opposed to crypto assets. His remarks followed many lawmakers and regulators proposing solutions to address stablecoins. Lawmakers have drafted legislation calling for a ban on algorithmic stablecoins, and Treasury Secretary Janet Yellen said in May that a “consistent federal framework” on stablecoins would be “highly appropriate.”

“Congress should take action to provide a strong federal framework for prudential oversight, and regulators must also use existing authorities,” said Barr.

Related: Basel Committee: Banks worldwide reportedly own 9.4 billion euros in crypto assets

U.S. Bank, one of the largest retail banks in the United States, announced in October 2021 that it launched a cryptocurrency custody service for institutional investors, one of the first major banks in the U.S. to do so. BNY Mellon followed in October 2022, announcing the launch of a digital custody platform for select clients’ Ether (ETH) and Bitcoin (BTC) holdings.

Financial Stability Board opens proposed crypto regulatory framework for public comments

“Effective regulatory and supervisory frameworks should be based on the principle of ‘same activity, same risk, same regulation,’” said the FSB proposal.

The international monitoring body Financial Stability Board, or FSB, has proposed a comprehensive framework for cryptocurrencies aimed at addressing potential risks while “harnessing potential benefits of the technology.”

In an Oct. 11 report, the FSB opened a possible crypto regulatory framework to public comment including proposed policy initiatives, financial stability risks and the approach the group could use to establish guidelines for digital assets. According to the report, the FSB will submit proposed recommendations “to promote the consistency and comprehensiveness of regulatory, supervisory and oversight approaches to crypto-asset activities and markets” to the G20 finance ministers and central bank governors.

“Effective regulatory and supervisory frameworks should be based on the principle of ‘same activity, same risk, same regulation,’” said the FSB proposal. “Where crypto-assets and intermediaries perform an equivalent economic function to one performed by instruments and intermediaries of the traditional financial sector, they should be subject to equivalent regulation.”

The board also targeted stablecoins in its report, suggesting a review of recommendations established in October 2020. Members of the public have until Dec. 15 to submit comments on the proposals.

In an accompanying letter to the G20 dated Oct. 3, FSB chair Klaas Knot cited recent “turmoil in crypto-asset markets” behind the group’s recommendations:

“The current ‘crypto winter’ has reinforced our assessment of existing structural vulnerabilities in these markets. Concerns about the risks they pose to financial stability are therefore likely to come back to the fore sooner rather than later, as are public expectations that policymakers have in place a robust international framework to identify, monitor and address those risks.”

Related: Biden’s cryptocurrency framework is a step in the right direction

Established under a G20 summit in 2009, the FSB has members representing institutions from 25 jurisdictions, including financial regulators, central banks and ministries of finance. However, the board largely has no enforcement authority over the entities, instead acting as an advisory body.

Stablecoins shed $38B since May as yields plunge, projects collapse

An estimated $148.7 billion worth of stablecoins are still in circulation.

According to the latest data from DefiLlama, the overall circulation of stablecoins has decreased by approximately $38 billion since early May. There are still $148.7 billion left in circulation, with the majority consisting of Tether (USDT) ($68.2 billion), USD Coin (USDC) ($46.7 billion), Binance USD ($21.4 billion), Dai (DAI) ($6.33 billion) and the Frax stablecoin (FRAX) ($1.33 billion). 

Meanwhile, the yields on stablecoin borrowing and lending on decentralized protocols (DeFi) such as Aave have fallen sharply. Back in May, the annual variable percentage rates (APR) on Binance USD, USD Coin, and DAI loans stood around 3.5%. Their APRs have since fallen to about 1.5%. Meanwhile, their utilization rates, or the percentage of stablecoins taken out as loans versus total supplied, have also fallen to around 30% to 40%, whereas the optimal levels for the protocols are about 80%. 

Unlike fiat deposits, stablecoins deposits do not automatically accrue interest due to their decentralized structure. Instead, users must place their funds at risk by lending them out or staking them on DeFi protocols. Borrowers then put the funds to work and pay lenders interest as consideration. However, recent interest rate hikes by the U.S. Federal Reserve have made fiat-dollar interest accounts more competitive while making it more costly to borrow. By proxy, this has decreased demand for stablecoin borrowing and lending.

The collapse of projects such as algorithmic stablecoin Terra USD has also dampened confidence in the stablecoin sector. In fact, the crumbling of USTC in May accounted for nearly 50% of the $38 billion stablecoin circulation plunge since then. Another stablecoin, Acala USD (aUSD), lost its peg in August after a protocol exploit caused 3.022 billion aUSD to be minted erroneously. The community has since voted to burn the vast majority of “tainted” aUSDs, but a small portion of glitched funds are still missing and was moved off the protocol. Stablecoins also face an uncertain future on the legislative side, with a draft bill in the U.S. House of Representatives proposing to ban algorithmic stablecoins for two years. 

The community has since voted to burn the vast majority of “tainted” aUSDs, but a small portion of glitched funds are still missing and was moved off the protocol. Stablecoins also face an uncertain future on the legislative side, with a draft bill in the U.S. House of Representatives proposing to ban algorithmic stablecoins for two years. 

Circle CEO says blockchain industry is transitioning from dial-up to broadband phase

Allaire believes that privacy and identity are two fundamental pillars of a new Web3.

At the Converge22 conference in San Francisco, Jeremy Allaire, CEO of stablecoin issuer Circle, said that the world is finally moving from the speculative value phase of crypto to the utility phase. Drawing parallels to the early days of the internet, he said:

“It is an architecture that the internet was founded on many decades ago — this idea of open networks, of open standards and protocols, of connecting entities, devices and people in interoperable ways, of a globally intertwined world of decentralized systems.”

As told by Allaire, there are currently on-chain mechanisms to ensure safe, trustworthy interactions between crypto users. However, there need to be “advancements” in technologies such as zero-knowledge proofs that prove identities and credentials while simultaneously ensuring individuals’ privacy:

“People need to be able to interact with apps, and services, and content and transactions without knowing that they’re using crypto. I don’t know I’m using SMTP [Simple Mail Transfer Protocol] when I send an email with Gmail — I do know that, but a lot of people don’t know that, and that’s okay.”

Allaire explained that for mass crypto adoption to happen, participants would need to be introduced to a much more simplified version of the underlying technology. “People don’t need to know what chain they’re on or even what stablecoin they’re using,” he said. “They just need to know that it’s frictionless interaction with data and money.”

Finally, Allaire said we are reaching the next “broadband” phase of blockchain, referencing the dial-up era in the early days of the internet. “We need safe, scalable and energy-efficient public blockchains” just as we did with the internet, he stated, raising the example of new developments such as Ethereum’s recent move to proof-of-stake and the emergence of layer-2 and layer-1 scaling models. He said the step was “necessary for this [blockchain] to become something that is used by everyday society for mission-critical applications.”

Converge22 in San Francisco. Source: Sam Bourgi

Bitcoin think tank: Reject CBDCs and look to BTC and stablecoins instead

The paper’s authors say Central Bank Digital Currencies are problematic for the future of individual and economic freedom, but crypto is a viable alternative.

United States think tank Bitcoin Policy Institute is calling for the United States to reject central bank digital currencies (CBDCs) and look to Bitcoin (BTC) and stablecoins as alternatives. 

In a white paper shared on Tuesday, authors including Texas Bitcoin Foundation executive director Natalie Smolenski and former Kraken growth lead Dan Held argue that CBDCs would strip the public of financial control, privacy and freedom.

Smolenski and Held argued that CBDCs would essentially “provide governments with direct access to every transaction […] conducted by any individual anywhere in the world,” adding that this could then become available for “global perusal,” as government infrastructure is a “target of constant and escalating cyberattacks.”

The pair also argued that CBDCs would enable governments to “prohibit, require, disincentivize, incentivize, or reverse transactions, making them tools of financial censorship and control:”

“As a direct liability of central banks, CBDCs become a new vanguard for the imposition of monetary policy directly on consumers: such policies include, but are not limited to, negative interest rates, penalties for saving, tax increases, and currency confiscation.”

Smolenski and Held suggest this greater focus on surveillance will mimic “the Chinese government’s surveillance efforts” in bringing state visibility to all financial transactions not already observed through the digital banking system.

“As the world goes the way of China in the 21st century, the United States should stand for something different,” they argued.

The authors said many of the functions CBDCs provide can already be solved with a combination of Bitcoin, privately-issued stablecoins, and even the U.S. dollar, noting:

“For most people, a combination of physical cash, bitcoin, digital dollars and well collateralized stablecoins will cover virtually all monetary use cases.”

Smolenski argued that Bitcoin and private stablecoins will allow instant, low-cost digital transactions both domestically and across borders, while digital dollars and stablecoins will continue to be subject to Anti-Money Laundering and Know Your Customer compliance by “the platforms that facilitate transacting with them,” adding: 

“The creation of CBDCs is, quite simply, unnecessary.”

The white paper also argued that governments are often out of depth with new technology, pointing to an incident earlier this year when the Eastern Caribbean Central Bank’s CBDC, DCash, went offline.

“In effect, where governments lead the implementation of CBDCs, serious stability and reliability issues will arise,” they wrote. 

CBDCs are already well on their way to development in some countries such as China, but earlier this month, President Joe Biden signaled that the U.S. is considering following suit after directing the Office of Science and Technology Policy (OSTP) to submit a report analyzing 18 CBDC systems.

Previous discussions around CBDCs in the U.S. have been marked with division and confusion, which is one of the author’s key issues with CBDCs — a lack of expertise by governments, along with potential privacy breaches and control.

To combat what they see as concerns with CBDCs, Smolenski and Held propose cryptographic stablecoins pegged to fiat currencies and backed 1:1 with hard collateral that can be issued by private banks worldwide.

Related: It’s now or never — The US has to prepare itself for digital currency

“This would provide all of the purported benefits of CBDCs for end users while precluding the levels of surveillance and control that CBDCs offer the state,” they said:

“The United States should stand for something different: it should stand for freedom. For this reason, the United States should reject central bank digital currencies.”

The Bitcoin Policy Institute describes itself as a nonpartisan, nonprofit organization researching the policy and societal implications of Bitcoin and emerging monetary networks.

Russian gov’t working on stablecoin settlement platform between friendly nations: State media

“Stablecoins can be pegged to some generally recognized instrument, for example, gold, the value of which is clear and appreciable for all parties involved,” said Alexey Moiseev.

Russia’s Finance Ministry has reportedly begun working with the governments of “friendly” nations to establish a cross-border stablecoin-based payments platform. 

According to a Tuesday report from Russia state-owned news agency TASS, Deputy Finance Minister Alexey Moiseev said the government was looking to create the settlement platform to avoid the use of U.S. dollars and euros. The finance minister reportedly said the Russian government would need to impose additional regulations to enact the platform between itself and friendly nations — possibly including China, Belarus and North Korea.

“We offer mutually acceptable tokenized instruments that will be used on these platforms, which are essentially clearing platforms that we are currently developing with countries,” said Moiseev. “Stablecoins can be pegged to some generally recognized instrument, for example, gold, the value of which is clear and appreciable for all parties involved.”

Russia has been the target of severe sanctions imposed by the United States and the European Union following the country’s invasion of Ukraine in February. The EU announced in March it planned to remove many Russian banks from the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, messaging system, and the U.S. Office of Foreign Assets Control added several Russian entities and nationals to its list of Specially Designated Nationals.

Related: The world has synchronized on Russian crypto sanctions

Amid the war in Ukraine, reports have suggested Russian officials had been exploring using cryptocurrencies to evade the imposed sanctions. In July, President Vladimir Putin signed a bill banning digital assets as payments into law, but the country’s central bank has reportedly considered using crypto for cross-border payments.

How to preserve capital during inflation using cryptocurrencies?

As major economies of the world grapple with high inflation, investors could protect their savings from value erosion by investing in stablecoins.

Just when the global economy largely recovered from the crippling effects of the COVID-19 pandemic, geopolitical tensions and the resultant supply chain pressures have once again roiled financial markets across the world. 

Furthermore, inflation has once again reared its ugly head, forcing central banks across major economies to raise interest rates in an attempt to curtail runaway prices of essential commodities like food and fuel. 

Despite these efforts, developed economies like the United States and the United Kingdom continue to report inflation at multi-year highs, adding even more stress on household savings and negatively impacting consumer spending. 

Apart from the threat of a looming recession, these inflationary pressures have a negative impact on the value of fiat money in the hands of consumers and highlight the need for financial tools or assets that can act as a hedge against inflation.

Impact of current inflation on the global economy

Along with its impact on the purchasing power of a country’s fiat currency, inflation has a detrimental effect on the true returns generated by financial instruments, especially if the inflation rate exceeds the rate of return on investment. 

Take, for example, the S&P 500 index, which comprises the top 500 publicly traded companies in the USA and acts as the benchmark index for the country’s stock markets. Having generated an average annualized return of 11.82% since its inception in 1928, this index’s performance can seem quite spectacular at the outset. 

However, with the Consumer Price Index (CPI) climbing to a 40-year high of 9.1% in June 2022, the returns generated from investments made in mutual funds that mimic this index will be significantly lower. 

In fact, the index has provided an inflation-adjusted historic annual average return of just 8.5%, that too when the average CPI has been much lower than the currently reported numbers.

Moreover, as the Federal Open Market Committee (FOMC) voted to increase the US Federal Reserve’s interest rate to a four-year high of 2.25% in July 2022, the U.S. dollar has appreciated significantly against a basket of fiat currencies including the euro, the Great British pound and the Japanese yen. 

While this has helped soften the prices of commodities like crude oil, it has a negative impact on the value of investments made by US citizens and companies at large in these economies. 

For savvy investors allocating capital toward emerging markets like Brazil, India and China, among others, the devaluation of these countries’ fiat currencies against the USD has only served to diminish returns on investments made in these markets.

What does inflation mean for cryptocurrency?

As compared to fiat currencies, cryptocurrencies like Bitcoin (BTC) have generated stellar returns for early-stage crypto investors. While the USD index has appreciated around 8% since August 2019, BTC has returned ~240% in the same period as per current prices. 

This is despite BTC correcting by ~60% from its peak in November 2021, further alluding to its long-term wealth creation potential. It can even be said that Bitcoin can protect people from the negative effects of inflation.

Related: Bitcoin and inflation: Everything you need to know

A similar trend can be seen among other popular cryptocurrencies like Ether (ETH), BNB Coin (BNB) and Ripple (XRP), hinting at cryptocurrencies being a good investment during periods of high inflation with the potential to generate inflation-beating retirement savings. 

Obviously, it is important to note that cryptocurrencies display much higher volatility compared with fiat currencies and are considered to be assets rather than pure currencies. Another aspect that favors cryptocurrencies like BTC is their limited token supply. 

With the original developer team setting Bitcoin’s maximum supply at 21 million BTC, it isn’t subject to the seemingly discretionary way in which fiat currencies like the USD are printed. 

This implies that under no circumstance will the number of BTCs in supply exceed the set limit, thus boding well for its long-term price appreciation potential. Even for cryptocurrencies like ETH that do not have a prescribed maximum supply limit, the mechanism of minting new tokens is based on code and computational work performed. 

No entity can mint ETH tokens without having created a new block on the Ethereum blockchain and the block reward mechanism depends on set factors like the complexity of calculations performed by miners. 

Compare this with the arbitrary way in which the U.S. Federal Reserve or any other Central bank in the world prints money and it is evident that cryptocurrencies operate in a much more transparent and democratic way.

Are stablecoins a hedge against inflation?

Among the broader cryptocurrency market, there are a growing number of crypto tokens being launched that are being specifically created to offer a better alternative to fiat currencies. 

Known as stablecoins, these cryptocurrencies are pegged to other traditional assets like the USD and gold, with their prices held stable by maintaining reserves equivalent in value to the number of tokens in supply. 

While some stablecoins are also backed by algorithms or are pegged to another cryptocurrency native to the same blockchain protocol, they all aim to provide crypto investors with a medium of exchange that can be transacted freely across geographical borders. 

Compared with fiat currencies or commodities such as gold, stablecoins are potentially better suited because:

Benefits of stablecoins compared to fiat currencies or commodities

This is especially important for people native to countries like Turkey, Argentina, Ethiopia, Zimbabwe, or Lebanon, where hyperinflation has deemed their fiat currencies a risky medium of exchange. Typically used to describe a monthly inflation rate exceeding 50%, hyperinflation refers to a situation when there is an expeditious and uncontrollable price increase of important goods and services in an economy.

As hyperinflation continues to erode the value of their currencies, people in such countries could switch over to stablecoins such as Tether (USDT), USD Coin (USDC) or Binance USD (BUSD) in order to protect their capital from rapid wealth erosion. 

By holding their savings in the form of stablecoins, they could preserve capital during inflation using cryptocurrencies and also benefit from the appreciation in the underlying peg to even increase the value of their savings. 

Since this is sacrosanct even in a high inflation and interest rate regime, hyperinflation has minimal effect on cryptocurrencies like stablecoins. Thus, for investors in economies plagued by high inflation, cryptocurrencies can act as an optimal investment, too.

Is it a good idea to put your money in crypto during inflation?

While there have been cases of cryptocurrencies failing miserably because of security concerns, fraud, or a combination of both, there are many cryptocurrencies that have stood the test of time and continue to attract hordes of investors. 

Related: How can third-world countries counter inflation using Bitcoin?

Apart from BTC and ETH, altcoins such as Avalanche (AVAX) and Polygon (MATIC), among others, could be a long-term hedge against inflation. Investors could allocate some capital toward these cryptocurrencies to potentially reap profits in the long term while also using products such as staking pools to earn additional income from these investments. 

Going by historic data, it can also be a profitable strategy to prudently invest in cryptocurrencies that are currently trading near important support levels and simply hold them as a hedge against inflation.

On the other hand, stablecoins, along with other cryptocurrencies, can be held in a digital or hardware wallet just like fiat currency in a traditional bank while still helping investors to protect their wealth from eroding in a hyperinflationary environment. 

In other words, stablecoins are safe from inflation as compared to currencies such as the Turkish lira, especially when they are pegged against the USD. That being said, there are a few stablecoins that have been notorious for trading below their peg, and investors would do well to maintain a cautious approach when trading or investing in them.

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3 reasons why Ethereum PoW hard fork tokens won’t gain traction

A lack of oracle support, the majority of DApps being supportive of the Merge and Ethereum Classic’s minimal developer activity suggests that PoW hard forks will fizzle.

Ether (ETH) is the second largest crypto by market capitalization and the absolute leader in decentralized applications by deposits. Becoming a victim of its own success, the network experienced a fee hike in November 2021 when the average transaction costs surpassed $50. 

That’s precisely why the Merge is a critical step to implementing a fully functional scaling solution. The confirmation of a transition to a proof-ofstake (PoS) consensus was the main driver for the rally toward $2,000 on Aug. 15.

Investors were partially excited about the reduced issuing schedule and likely a transition to a deflationary scenario, but there’s also the expectation of upcoming forks. As a result, hard-forked coins may be awarded to Ether holders on different blockchains, even though there’s no guarantee those will find traction or sufficient liquidity.

From one side, there’s the temptation of free money and even bonus non-fungible tokens (NFTs) as the forked chain will initiate with the same state of the original Ethereum network, meaning each address will hold the exact same contents in terms of tokens and transaction history.

On the other hand, there’s also a sense of disappointment after Ether’s agonizing 29% correction that took place after the $2,000 resistance proved to be more challenging than expected. It’s possible that as investors realized that the practical utility of the forks would be much lower than anticipated, the exuberant expectation of free money dissipated, and reality kicked in.

ETHPoW, for now, is a possible new chain backed by proof-of-work (PoW) miners. Some exchanges have initiated futures trading for the fork chain native asset, ETHW. Markets seem to have given their opinion, as the contract is now trading below $55 at Poloniex and Gate.io.

There’s no backing and oracle support for forked stablecoins

The two leading stablecoins, namely USD Coin (USDC) and Tether (USDT), have officially confirmed intentions to exclusively support the Ethereum Foundation-backed Merge chain. Cointelegraph previously reported that given that the two stablecoins dominate, the issuers’ support “should result in a smooth transition for Ethereum.”

Meanwhile, the core team behind EthereumPoW (ETHW) said they would temporarily freeze tokens in certain liquidity pools of DeFi applications to protect user assets after the hard fork.

The idea of freezing users’ assets without their consent didn’t go well with many. Some users called the Twitter account behind EthereumPoW a scam because the community has voted on no such change.

DApps go beyond merely facilitating transactions because, as they interact with external data, request off-chain computing and this is where blockchain oracle technology comes into play.

Chainlink enhances smart contracts by linking them with real-world data, events and transactions. In an official announcement on Aug. 8, the protocol revealed that its services would remain on the Ethereum PoS blockchain which is supported by the Ethereum Foundation.

Related: MakerDAO co-founder recommends DAI-USD depegging to limit the attack surface

Leading DApps will incentivize users to ditch forked tokens

On Aug. 16, Aave (AAVE) holders were asked to take part in voting to” commit” to Ethereum’s PoS consensus, giving power to an authority to shut down any Aave deployments on any alternative Ethereum forks.

Despite being designed exclusively as an Ethereum application, Aave has become interchain over the years and currently has its official versions running on Avalanche, Arbitrum, Optimism, Polygon, Fantom and Harmony.

Investors are starting to realize that the DApps and stablecoins will not support forked chains, meaning the “free” tokens and NFTs are less likely to be accepted in marketplaces and leading DeFi applications. Regardless of the ETHPoW token value, the utility of the PoS network supported by the Ethereum Foundation far exceeds the utility of competing chains.

Ethereum Classic never gained traction

Ethereum Classic (ETC) is a pre-existing example that supports the thesis that a competing chain will not undermine Ether’s (ETH) price. The original hard fork followed a 2016 consensus change and aimed to reverse a $60 million exploit. The DApps on this competing proof-of-work (PoW) chain never gained traction despite its $4.5 billion market capitalization.

Current data suggests that Ether traders should disregard the upcoming forks and focus on the roadmap toward scalability and whether or not the network maintains its position as the leader by total value locked.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.