The Merge is Coming
Plus: Crypto decoupling?
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This week we cover Ethereum’s progress towards the merge, analyzing key on-chain data and market considerations surrounding this milestone.
We also dive into crypto and stocks recent diverging path and evaluate arguments in favor and against of a deeper decoupling between the two.
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.
- Bitcoin fees continues at stagnant levels, reaching their lowest in two months
- Ethereum revenues have been surging past couple of weeks with NFTs and a few airdrops consuming a large portion of the gas
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.
- Bitcoin saw outflows of $730M a week after another billion left centralized exchanges, suggesting strong demand just under the $30k level
- Ethereum saw mild outflows of $84 million after weekly inflows of over $200M
The Merge is Coming
Roughly a year and a half after the deployment of Ethereum’s proof of stake chain (aka the Beacon Chain) launched, the transition for applications to move there is closer than ever. The so-called Ethereum 2.0 merge was successfully implemented in the Ropsten testnet. This marks one of the final steps prior to its implementation on mainnet, likely between August or September of this year.
Given this milestone, we analyze the growth of ETH staking through key metrics, highlighting the increasing adoption, but also the discounted price of staking tokens. More importantly, we clarify what this all means and why the merge is such an anticipated milestone after all.
10%+ Staked — Over 10% of all Ether in circulation is deposited into the staking contract
- These 12.8 million ETH are earning roughly 4% on their deposits
- Interest rates earned for staking ETH will climb after the merge as transaction fees that currently go to miners will instead be provided to those staking
- The growth in staking effectively makes the Ethereum network more secure, since if someone were to attack it would be increasingly costly to attempt to hold over 51% of the amount staked
Liquid staking services such as Lido have facilitated this growth by allowing anyone to stake their ETH regardless of how much they hold (you are required 32 ETH to do so independently, which is prohibitively expensive for most people).
Lido Dominance — Over 33% of all Ether staked is done through Lido
- This has led to 62k holders of Lido’s staked Ether (stETH token)
- While this has facilitated greater adoption of staking it has also raised questions about having a high share concentrated through one entity
- Along with this criticism and the unfavorable market conditions, the price of stETH has underperformed Ether
Discounted ETH — stETH will be redeemable 1-to-1 for ETH when withdrawals from the merge begin
- These withdrawals will not occur right after the merge, but rather a few months later in a gradual manner
- This is one of the factors propelling stETH’s discount relative to ETH
- The discounts accelerated on May 12 as UST’s crash led to a reckoning in the market, re-evaluating assets pegged to be one to another
Despite Ethereum’s successful Ropsten merge, stETH’s discount became even greater. This begs the question: is the market betting on lower odds of it being implemented on mainnet as expected? Or is this simply an opportunity to buy ETH at discounted prices?
Crypto Decoupling?
Following months of crypto and stock markets moving in tandem, they have began to deviate over the past few weeks. This is reflected in their decreasing correlations as shown below.
Short-Term Pause or Change of Trend? Despite crypto prices being less correlated to stocks, the duration of this trend is still unclear.
- Times of instability typically exacerbate higher correlations as liquidity exits financial assets, particularly those perceived as risky
- With the market still focused on interest rate hikes and quantitative tightening, there is a case to be made for crypto to continue to move in tandem with stocks for the foreseeable future
- On the other hand, sector-specific milestones such as Ethereum’s merge or Senators’ plans to incorporate crypto into the broader economy can potentially be driving forces for crypto to deviate from traditional finance
Overall, the economy remains at an uncertain stage. While this has taken a toll on risk appetite, factors within crypto such as the successful merge testnet launch keep improving the industry’s outlook — even if it’s not reflected in the price. Will these be enough for crypto to decouple, or will macro continue taking the lead?
Upcoming Webinar
Sign up for our next webinar. Limited amount of free seats available.
Approximately $45 billion in value disappeared as a result of Terra’s collapse, making it one of the largest losses in crypto’s history. This debacle is a result of unsustainable tokenomics, unfavorable market conditions and perhaps a few entities exploiting these economic vulnerabilities.
In this webinar we examine the unprecedented crash of UST and Terra, analyzing the most relevant on-chain data from whales, exchanges and DeFi protocols. We also provide best practices to manage risks not only in circumstances like this, but also in general when using crypto applications.
