Projecting the Impact of the ETH Merge
On-chain data trends suggest positive outlook in spite of macro woes
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This week we have observed ETH outperform following news of the merge being scheduled for mid to late September. In this edition of the newsletter we provide data into the effects the merge will bring forth on Ethereum and liquid staking providers. Specifically, we project Ether’s deflationary issuance and staking rewards, and the secondary effect on liquid staking revenues.
Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- Fees in both Bitcoin and Ethereum spiked as blockchain activity grew in tandem with price
- On Ethereum, DEX volumes brought in a higher amount of fees than usual as volumes spiked
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation.
- Bitcoin recorded modest net inflows into exchanges of $79M
- ETH saw the largest net outflows from exchanges in two and a half months as the merge momentum renews
Projecting the Impact of the ETH Merge
Crypto has rebounded strongly over the past week, with all eyes set on the Ethereum merge. The long-awaited shift to proof of stake is set to take place around September 19 based on Ethereum developers’ target. This has led ETH to outperform with an increase of over 40% month-to-date.
Risk-On — Multiple tokens saw increases of over 20% in the past week, with Ethereum-related tokens shining, but still closely following stocks
- Ethereum Classic (ETC) saw an increase of 76%
- Liquid staking providers Lido and Rocket Pool recorded 73% and 49% spikes respectively
- ETH grew its value by a third over the week, but its correlation to the Nasdaq remains at a high level of 0.81
This pattern suggests that while ETH’s outperformance versus other crypto-assets is likely linked to improving fundamentals, macro conditions are still driving the broader trends.
One of the reasons driving ETH higher into the merge is its reduction in issuance that will come once it moves to proof of stake.
Deflationary ETH — While inflation in global economies remains at high levels, ETH will likely become the largest deflationary currency
- The amount of Ether issued will drop by approximately 90% as it will no longer be needed to incentivize miners
- Following the implementation of EIP-1559 a year ago, 80% to 85% of transaction fees get burnt, which is likely to lead to more ETH getting burned than issued
- Based on 2022 fee data, this would suggest Ether’s inflation will range between -0.50% and -4.50% following the merge
Simultaneously, fees that are not burnt will no go to those staking ETH in order to incentivize greater network security since they will be validating consensus. This will make it significantly more attractive to stake ETH.
6% to 7% Yields — Returns from staking ETH will climb significantly from the current 3.9% level
- Higher staking yields incentivize more ETH being staked
- This leads to greater security, since it becomes more costly to acquire 51% of the ETH staked
- Therefore, the economic benefits coming from the merge have a real impact on the network
As a second order effect, higher yields will lead to greater revenues for liquid staking providers such as Lido.
60%-70% Greater Revenues — Lido’s revenues are expected to climb proportionately to the increase in staking yields
- Those staking ETH will not be able to withdraw their funds until 6–12 months after the merge when the Shanghai fork takes place
- Until then, the amount of Ether staked with Lido can only grow
- Given that yields will increase, it is likely that the amount staked will also climb, which would drive the above projections to even greater amounts
Worth highlighting how these revenues are in ETH terms, however. If macro conditions worsen and correlations remain high, liquid staking revenues may actually still go down in dollar terms.
Overall, the merge poses great economic benefits for Ether holders, which are driving its current momentum. These translate into greater security, while also making the network more eco-friendly. Ultimately, this sets the base for one of crypto’s most anticipated internal catalysts, even if external conditions may weigh down on this milestone.
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