The Ethereum Merge in September 2022 marked a historic shift from Proof-of-Work (PoW) to Proof-of-Stake (PoS). While this upgrade was celebrated globally, it also created unique opportunities for arbitrage. One particular case, where a team claimed profits of nearly 20,000 ETHW (worth approximately $200,000 at the time), drew significant attention.
This article breaks down the mechanics of this arbitrage strategy, the risks involved, and how on-chain analysts uncovered the details.
Understanding the ETHW Fork and “Ghost Assets”
EthereumPoW (ETHW) emerged as a continuation of the PoW chain after the Merge. Like any blockchain fork, ETHW inherited all the existing account balances, assets, and smart contracts from the original Ethereum chain.
However, not all forked assets hold real value. Stablecoins like USDT and USDC, for instance, are backed by real-world reserves. Issuers like Tether and Circle explicitly stated that they would not recognize or redeem stablecoins on any Ethereum fork, including ETHW. As a result, these assets became essentially worthless—often referred to as “ghost assets” or “fun tokens.”
Yet, ETHW itself did have market value, as some exchanges listed it for trading. This discrepancy between valueless stablecoins and valuable ETHW set the stage for arbitrage.
The Arbitrage Strategy: Turning “Ghost Assets” into Profit
The core of this arbitrage strategy revolved around decentralized exchange (DEX) liquidity pools. Many liquidity providers (LPs) had not withdrawn their assets from pools on the original Ethereum chain before the fork. After the fork, these pools existed on both chains—ETH PoS and ETHW.
Arbitrageurs noticed that some pools on ETHW still contained valuable ETH or WETH. They deposited large amounts of worthless forked stablecoins (like USDT on ETHW) into these pools. By doing so, they “bought” the valuable ETHW at a massively discounted rate, thanks to the automated market maker (AMM) pricing mechanism.
Once they acquired the ETHW, they transferred it to supported exchanges, sold it for other cryptocurrencies or fiat, and realized their profit.
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Key Data and Findings from the On-Chain Analysis
On-chain analysts tracked the transactions and identified the most profitable addresses involved in this scheme. Contrary to some public claims, the address that boasted the highest gains was not the top earner.
According to public data, arbitrageurs collectively gained over 217,129 ETHW, valued at approximately $2.67 million at the time. The most successful single address earned nearly three times more than the one that had publicly claimed the $200,000 profit.
This incident highlights how quickly and significantly funds can be moved in DeFi—especially during network upgrades or forks.
How to Identify and Mitigate Similar Risks
This type of arbitrage isn’t new. In fact, the same method is often used maliciously in “rug pulls,” where developers drain liquidity pools of valuable assets using worthless tokens.
To detect such activity, projects and users need access to real-time on-chain monitoring and analytics. Advanced tools can track large or suspicious transfers, monitor liquidity pool health, and flag high-risk tokens.
Some platforms now offer:
- 24/7 risk-token scanning
- Rug pull detection labels
- Liquidity change alerts
- Multi-chain DEX support
These features help investors and projects identify vulnerabilities before they are exploited.
The Growing Importance of On-Chain Security
The rise of such arbitrage opportunities and exploits underscores the need for robust blockchain security measures. This includes both:
- On-chain data analysis to monitor transactions, liquidity, and token metrics in real time.
- Smart contract auditing to review code for vulnerabilities or malicious logic.
Together, these two pillars form a comprehensive security framework, essential for anyone operating in the DeFi or wider Web3 space.
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Frequently Asked Questions
What is a blockchain fork?
A fork occurs when a blockchain splits into two separate chains. This can happen due to fundamental protocol changes or community disagreements. Forks can be “hard” (permanent split) or “soft” (backward-compatible update).
Why were stablecoins on ETHW worthless?
Stablecoins like USDT and USDC are centralized assets. Their issuers did not support the ETHW chain, meaning these tokens could not be redeemed or transferred with real-world value.
How can I protect my assets during a fork?
Withdraw liquidity from pools before a scheduled fork. Move assets to cold wallets or supported exchanges. Use on-chain monitoring tools to track pool health and token risks.
What is a rug pull?
A rug pull is a scam where developers abandon a project and drain the liquidity pool, often by swapping valuable assets for worthless ones—similar to the arbitrage method described above.
Are forks common in crypto?
Forks are relatively common, especially in large, decentralized networks like Ethereum or Bitcoin. They can be contentious (e.g., ETH/ETC split) or planned (e.g., Ethereum Merge).
How do on-chain analysts trace such transactions?
They use blockchain explorers and analytics platforms that index and visualize transaction data, token flows, and wallet histories across multiple chains.
Conclusion
The ETHW arbitrage incident is a classic example of how market inefficiencies—especially during chain forks—can be exploited for significant gain. It also highlights the importance of on-chain vigilance, robust monitoring tools, and proactive security practices for everyone in the crypto ecosystem.
As blockchain technology evolves, so do the strategies of those who operate on it. Staying informed and using the right tools are the best defenses against emerging risks.