Eth may be headed for a fork into a censored and uncensored chain after the Merge due to US sanctions

In case you've been living under a rock, some backstory: About two weeks ago the US government issued OFAC sanctions against an Eth smart contract called Tornadocash that is basically a coin tumbler, used to hide the source of your crypto. US persons who are caught interacting with this smart contract are subject to criminal penalties including prison time. Anyone who is a US person or does business in the US is exposed to OFAC sanctions. A company based in the Cayman Islands for example could still be forced into compliance if its board members are US persons or they do business in the US.

After the merge, US based validators (PoS stakers) may be prevented from validating OFAC sanctioned transactions (e.g. tornadocash) if the US government says so. Currently it is unclear whether this is the case. Anyone exposed to these sanctions is likely err on the side of caution to avoid jail time. Example - ethermine have been censoring Tornadocash (sanctioned) transactions for a week already (Bitfly who own ethermine will also be operating validators after the merge - I'd take this as a good indicator of their expected approach to this post-merge).

There is a very large portion of the total Eth stake that would be exposed to these sanctions including some very large centralised actors such as Lido, Coinbase and Kraken. These 3 alone hold roughly 45% of all staked eth. Lido alone hold 31%. They can exit their stakes immediately up until the merge, when the rules on this change. After the merge there is an exit queue mechanism where only 44k eth can exit the validator set per day. If just lido and coinbase both try to exit it would take about 2 months for all the validators to be removed from the list of validators. Until you're removed from the list you are expected to validate and are subject to penalties if you don't.

These validators will be forced to either 1. Violate OFAC sanctions, 2. Censor the transactions, or 3. Abstain on blocks with sanctioned transactions.

The board of Lido, Coinbase etc. are not going to prison for the good of Ethereum so we can safely rule out option 1 - despite what they may say on twitter.

If they take option 2 and censor, their stakes will get slashed (they lose 50% of their customer's funds) and their validators get kicked off the network.

If they take option 3, abstaining, they will also bleed out due to a penalty called inactivity leak, losing 50% of customer funds, and get kicked off. Inactivity leak is normally a very minor penalty, however if more than 33% of validators are inactive it gets much more severe each day (because this prevents block finality) and after 21 days, 50% of funds will have been lost and you are kicked off. Because so many validators will be exposed to the sanctions it is highly likely the severe leak penalty will be applied if they are all abstaining.

Proof of Stake works a little different to PoW - in PoS validators must attest both to transactions in the current block and in previous blocks. It could be very hard for US based validators to avoid attesting to any sanctioned transactions.

The 4th option is to fork into a censored ethereum chain. It is very likely that their customers will start screaming for this when they see their eth stakes melting due to penalties (slashing/leaking).

The Ethereum Foundation's response to this issue? "This is why we recommended against using centralised staking pools." They have also confirmed they are strongly against censorship and anyone who censors will get slashed. In short, they aren't going to do anything of substance to prevent this.

If US validators fork off into censored-eth, taking a copy of eth's defi system, stablecoin operators will have to choose a chain to support with their collateral. Unfortunately, it is again very likely that Circle, and probably Tether also, will opt to support the censored chain - this is because, as we all know, a lot of the money in the market comes from the USA. Stablecoin operators are already in the spotlight and they would likely see even more intense scrutiny if they were to instead support the uncensored chain. Both Circle and Tether are exposed to US law.

On whichever chain the stablecoin operators abandon, the entire defi system will basically implode. Stables are used for collateral almost everywhere you look. They will become worthless on the chain they abandon.

Unfortunately the OFAC sanctions have come at the perfect time for this to be a problem. Once the merge happens it is too late to prevent this because of the exit queue system in place for validators. The only way to 100% guarantee this scenario does not play out is for Lido, coinbase and Kraken to voluntarily exit their stakes before the merge. If the US decides to change the law after the merge and make this illegal for validators, the government has already won as there will be no way for Lido, Coinbase, Kraken and other centralised parties to avoid losing massive portions of customer's funds except by forking into a censored version of eth, where the US government will be able to keep pulling the strings.

Another issue with this is that the boards of these companies are legally obligated to act in the best interests of their companies (and not their customers, or ethereum). Lido essentially shutting their main business down flies directly in the face of this fiduciary obligation. It's hard to say how that will play out.

So we may be left with an uncensored eth that is in tatters because the stablecoins have abandoned that chain, and a censored chain that is essentially subject to the will of the US government - something Ethereum was specifically meant to avoid.

Right now the best thing we can do is look for ways to prevent this. I would start by campaigning for Lido, Coinbase, Kraken and other staking pools exposed to OFAC sanctions etc to exit their stakes ASAP

ELI5: A very real possibility that ETH may fork at or after the merge into two chains, dividing the eth community and perhaps (probably?) hurting the overall value of ETH; a censored, US-centric chain under the influence/control of the US government, and an uncensored chain that may be abandoned by stablecoins, effectively crashing defi on the uncensored chain. Only if Lido, Coinbase and Kraken exit their ETH stakes prior to the merge can we be certain this doesn't happen. This would be a result of recent US OFAC sanctions against Tornadocash.