The Ether merger is coming soon, what can we do about it?
The Ether merger is coming soon, what can we do about it?
With the successful completion of the Goerli test network merger, the TTD was set at 58750000000000000000000 and the merger is tentatively scheduled between September 15-16.
The benefits of the merger have been discussed countless times, but there are good reasons for these discussions. The event wasEtherOne of the most important catalysts in history, it has influenced the web in several ways.
For example, the merger would significantly reduce Ether's energy consumption, easing critics' concerns about its environmental impact and making the asset more attractive to ESG-conscious institutional investors.
The merger will also clear the way for optimizing for Ethernet at the protocol level, such as the separation of proposers from builders. This helps democratize MEV extraction by separating block production and block validation, as well as EIP-4844, which will reduce rollup transaction costs by an order of magnitude.
Finally, the merger will significantly increaseETHThe attractiveness of the asset. the issuance of ETH will reduce it by approximately 90%, likely making it deflationary, while also providing investors with the ability to earn a return on their holdings.
The most obvious way to understand this momentous event is to buy is to buy ETH ...... but more than that.
Let's explore four different ways that investors can use mergers.
A special disclaimer, our articles are not intended as investment advice, please think independently, or the same thing: invest with caution and trust no one.
1. Liquidity pledge tokens
Example:LDO, RPL, SWISE
Liquidity pledge services are the most immediate beneficiaries of this merger, with non-custodial agreements likely to see significant growth in the months following the transition to PoS.
The value proposition of a liquidity pledge is simple; it allows users to perform three operations simultaneously: maintain custody of collateral, earn pledge rewards, and deploy assets within DeFi by issuing liquidity pledge derivatives (LSDs).
The merger will greatly accelerate the development of these agreements as it will reduce pledge risk by eliminating pre-merger technical and execution risks.
In addition, the completion of the merger and a clearer withdrawal schedule will also help reduce the trading discount of LSD versus ETH.
The beacon chain will not be rolled back until the Shanghai network is upgraded, but rather 6-12 months after the merger. However, the size of the merger will drive a reduction in this discount, allowing pledgers to take less price risk, leading to more attractive pledges with these agreements.
In addition, deposits on liquidity pledge agreements may increase due to the expected increase in pledge yields. Today, beacon chain verifiers can only earn block rewards. After the merger, pledgees will be able to earn transaction fees and revenue from MEV. This is expected to result in a significant increase in ROI from the current ~4% to 6-12%.
These growth drivers should also increase revenue from liquidity pledge agreements due to deposits, higher yields and potentially higher ETH prices.
There are currently three liquidity pledge protocols for publicly traded tokens: Lido (LDO), Rocket Pool (RPL), and Stakewise (SWISE).
Each token can play a different role in the portfolio:
- Investors looking for blue chip exposure can choose LDO as it is the largest pledging entity on the beacon chain with a deposit share of 31.2%. Lido has greater control in the liquidity pledge space with a market share of 90.3% in this market segment. The token currently trades with a market cap of $1.48 billion and an FDV of $2.7 billion.
- Investors oriented towards token economics may be interested in Rocket Pool's RPL, the second largest liquidity pledge protocol with a 1.6% share of beacon chain deposits and a 4.5% share of the liquidity pledge space with an MC of $467.52M and an FDV of $51.73M. RPL has unique token economics that Operators or entities verified through Rocket Pool need to purchase 1.6 ETH worth of RPL for each of their new verifiers, which ties the demand for tokens to the growth of RPL.
- Investors looking to maximize risk and optimize beta can look at (StakeWise,SWISE), which has a trading MC of $26.66M and an FDV of $198.45M. Although the protocol accounts for only 0.4% and 1.3% of the beacon chain and liquidity pledge deposits, it may have the highest beta of the three tokens due to its smaller size and lower float.
2. Event-based DeFi betting
Buying tokens is not the only way to gain exposure to consolidation. Savvy market participants can use DeFi in a variety of ways to "trade the narrative" and express their views on how different markets react before, during and after a transaction.
Users can do this by borrowing ETH on cryptocurrency markets such as Aave, Compound and Euler. During the merger, there could be a considerable increase in demand for borrowing ETH as investors will want to accumulate as much assets as possible to farm airdrops from a potential PoW-based ethereum fork.
The rate curve for ETH on Aave V2 starts to "kink" or accelerate rapidly when utilization reaches 70%. With the market currently at 61.56% and having risen sharply since August 8, this scenario is certainly possible.
Of course, this strategy is not without risk. In the extreme case of very high borrowing demand, it means that there is little ETH liquidity in Aave and lenders may not be able to withdraw assets for a while until borrowers repay or more deposits flood into the agreement.
A second way to use DeFi to express a view on merger-related events is to use the Voltz Protocol, an AMM used in interest rate swaps to bet on the pledged yield of LSDs.
Since pledged returns may increase after the merger, market participants can use Voltz to make this point by using ETH as margin and buying variable rate stETH or rETH tokens. Users can use leverage to amplify their returns, although this of course entails more risk. Please be careful when using any form of leverage!
3.PoW Airdrop Farming
With billions of dollars at stake in the mining industry, as Lucas wrote earlier this week, some instances of PoW in Ether will almost certainly exist after the merger. Numerous prominent industry players, such as Justin Sun and his exchange Poloniex, have pledged their support for such a hard fork and plan to list ETHPOW tokens.
While it's unclear whether the forked chain will have a long-term lifespan or how much value ETHPOW will have, users can still access the seemingly inevitable airdrop in a number of different ways.
The easiest way to qualify for the airdrop is to put ETH into an unmanaged wallet (Metamask,CoinbaseWallets, etc.).
But if you're looking for riskier opportunities, one way to make a bet on the other side is to borrow ETH on the currency market and profit if the value of the airdrop is greater than the cost of borrowing ETH. However, this strategy also carries considerable risk. Not only could the borrowing rate exceed the return on the short sale, but if the price of ETH spikes, or the value of its collateral drops, the borrower could be liquidated. Given the high likelihood of massive volatility on the day of the merger, investors will need to proceed with great caution.
Another way that an investor can short a position without taking any price risk is to create a delta-neutral ETH position using perpetual futures. To do this, users would purchase spot ETH while shorting the equivalent value of ETH using PERP on CEX or DEX. In this way, users have access to ETH so they can get shorted without taking on the price risk associated with holding the asset. This strategy will be profitable if the value of the short sale exceeds the cost of maintaining the position.
However, there is no such thing as a free lunch. This strategy carries a great deal of risk, as funds (such as borrowing rates) can skyrocket with consolidation. Any kind of leveraged strategy like this, combined with volatility, puts users at great risk of being liquidated.
Please proceed with caution!
4. Other Benefit Opportunities
The merger will have a transformative impact on other areas of the ethereum ecosystem.
One beneficiary is L2, as the transition to PoS will pave the way for scalability upgrades (e.g., EIP-4844), which will significantly reduce transaction costs for end-users at aggregation by reducing the cost of storing call data on the chain. This reduction in costs should help facilitate L2 adoption by increasing the number of users that can transact on the network and unlocking the ability to create new and novel dapps.
Investors can (and have started to) take advantage of this by investing in the entire L2 ecosystem, such as the L2 foundation layer (OP), or L2 native DeFi projects such as Synthetix (SNX) and GMX (GMX), or smaller market cap projects native to different ecosystems. There are also L2-enabled infrastructures such as Synapse (SYN) and fast bridging services such as Hop Protocol (Hop).
Another area that will change as a result of the merger is MEV. the competitive dynamics of MEV will change dramatically with the implementation of the proponent-builder separation, which will separate the production of blocks from their validation.
There are many projects in the MEV stack that use publicly traded tokens that can provide a way to gain exposure to this shift, such as Manifold Finance (FOLD) Rook Protocol (Rook) and Cow Protocol (Cow).
These tokens have been running quite well in recent weeks, but they are still expected to be long-term beneficiaries of PoS Ether.
A special disclaimer, our articles are not intended as investment advice, please think independently, or the same thing: invest with caution and trust no one.
Summary:Choose your adventure
Consolidation is rapidly approaching and promises to bring significant changes to the Ether economy and can cause short-term on-chain disruptions.
The safest way to invest is to buy ETH.
But it's not the bear market of 2018 anymore, and we live in a DeFi world, so there are many other ways investors can participate in the merger, whether it's through investing/trading in liquidity pledge agreements or using DeFi to earn income.
What would you choose to do?
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