The Impact of ETH’s Merge Delay
Plus: Crypto stocks underperform Bitcoin
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This week we discuss the delay of Ethereum’s transition to proof of stake and the impact it will have both on staking rewards and the broader network. We also get into the subpar performance of crypto stocks as Coinbase hits an all-time low.
Weekly Fees — Sum of total fees spent to use a particular blockchain in a week. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- Blockchain fees overall plummeted, with both Bitcoin and Ethereum seeing about 33% declines relative to last week
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges over the past seven days. Crypto going into exchanges may signal selling pressure, while withdrawals potentially point to accumulation.
- Almost half a billion worth of Bitcoin left centralized exchanges, with investors seemingly eager to accumulate near the $40k level
- ETH recorded inflows of approximately $100M into centralized exchanges after four consecutive weeks of large outflows
ETH’s Merge Delay Impact on Staking
The highly-anticipated ETH 2.0 merge will not be ready by the June target set by Ethereum developers last year. The merge will mark Ethereum’s transition to proof of stake, minimizing its energy consumption while also making the network more secure and profitable to stake in.
That final part had been one of the most awaited features, with the community rallying behind what was initially projected to be 12% to 15% APYs for staking following the merge. However, conditions have since changed, with on-chain metrics pointing to significantly lower staking yields once the merge takes place.
11.5 Million ETH — The amount of Ether staked continues to grow well past 10 million ETH
- This represents approximately 9.5% of Ether’s circulating supply, currently locked within the staking contract
- In dollar terms the growth can be appreciated with the value staked nearing all-time highs despite ETH’s price being down 37%
- Growth has accelerated since the launch of stETH, a staking derivative token, as collateral on the Aave lending protocol
While the growth of the amount of ETH staked makes the network more secure, it also means that the rewards received for protecting the network decrease proportionally. With the merge being delayed “a few months”, it likely means that the amount of ETH staked will grow even further, resulting in lower yields.
The amount of ETH staked is one of the three key factors affecting the staking APYs following the merge. Another one is the fees processed by the Ethereum network.
Down 75% — The amount of fees paid to use Ethereum have declined substantially as activity in DeFi and NFTs has dried up
- NFT volumes on OpenSea have fallen similarly, from a high of approximately $250M on February 1st to $70M on April 14
- Trading volumes on Uniswap have decreased to a lesser extent (~ 33% comparing the weekly high on late January vs last week)
- However, due to the relatively sideways market trend there has arguably been lower urgency to execute transactions, leading to traders being less willing to pay high fees
In its current proof of work form, Ethereum fees that are not burned go to miners. Once the merge with the proof of stake chain takes place, these fees will be provided to those staking in compensation for securing the network. Hence, the declining level of network activity has also taken a toll on the financial interests of Ether holders.
6% Is The New 12% — given the recent trends over the last 7, 30 and 90 days, the Ethereum staking APR is likely to be within 6% to 8% if the merge goes live on September
- Yields across crypto have contracted as capital continues to flow in and there is relatively less capital compensating every deposit
- Ethereum staking rewards are no exception, with the amount of ETH staked growing particularly quickly over the past 30 days
Even though these yields may be less attractive, they reflect the maturation of Ethereum, which has over $35 billion staked. This also provides greater security assurances as it makes it costlier to attempt to control over half of the amount staked. Overall, this may be better for the Ethereum network even though it may disappoint those seeing lower APRs than expected by the time the merge (eventually) goes live.
Crypto Stocks Underperform
COIN All-Time Low — The largest publicly-traded crypto company hit its lowest valuation since going public a year ago
- Even though Coinbase has closely followed crypto prices, it has lagged behind Bitcoin and even more behind Ethereum
- The trend is mirrored throughout crypto stocks, with Bakkt being down 63% and the exchange Voyager by as much as 80% over the past year
When adjusting for volatility, most crypto stocks still underperform.
Lower Returns, More Volatility — Contrary to popular belief, Bitcoin and Ethereum have actually been less volatile than many stocks, especially those with crypto offerings
- The Sharpe ratio accounts for returns relative to price volatility. In this regard, most crypto companies match or underperform Bitcoin
- The Sortino ratio considers returns relative only to downside volatility. Here Bitcoin performs even better than MicroStrategy and Coinbase’s stocks
The notion of “risk” may be changing. With crypto-assets significantly outperforming crypto companies, traditional investors may want to reconsider the best way to get exposure to the industry.
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