Children of The Merge: Who Wins When Ethereum Upgrades?
The merger of Ethereum’s proof-of-work (PoW) mainnet and proof-of-stake (PoS) Beacon Chain is approaching with all the bluster of a summer blockbuster movie. It’s been followed, talked about, and teased, with previous release dates having been postponed multiple times.
“The Merge” is coming: starring Vitalik Buterin as a nerdy computer genius running against the clock to change the Ethereum blockchain’s consensus mechanism before supervillain Gary Gensler, US Securities and Exchange Comission chairman, can charge him with hosting an illegal initial coin offering. Will Buterin beat the odds? Pass me the popcorn.
After all the dilly-dallying, we now have a confirmed date for The Merge. And that precise date is September 19 — maybe.
While the date may just be another in the long list of unfulfilled deadlines, the devs working on “The Merge” say this is as an educated estimate. But it was enough to fuel a 60% rally in the price of ether (ETH) in the weeks following the announcement.
But, while everyone is afraid of missing out on ETH, I thought we could take a look at some of the protocols within the larger Ethereum ecosystem that might benefit from this event. As always, this isn’t investment advice, but rather a tour of some interesting projects I like to call “Merge adjacent.”
Lido DAO and Rocket Pool
Lido and Rocket Pool are protocols that give investors the chance to earn future post-Merge yield on their ETH by staking it. The protocols issue derivative tokens that represent tokens staked on the protocol that can be traded. These are called stETH and rETH, respectively.
When The Merge happens, Ethereum’s blockchain will switch from using the proof-of-work consensus mechanism to proof-of-stake. This means that the network will be secured by a network of validators who receive ETH as an incentive. Currently, there are about 400,000 validators earning about 5% annual percentage yield (APY).
To become a validator, you have to stake 32 ETH (currently valued at over US$45,000), which is a high barrier to entry. The stake acts as collateral to ensure validators behave themselves, so it needs to be a large amount.
Those who can’t afford 32 ETH can pool their resources using Lido and Rocket Pool. The two protocols collect all the funds and use them to sponsor their own validator nodes. The APY is then shared among stakers.
The stETH+ETH Curve Pool
OK, so let’s say you have staked some ETH on Lido and you’ve got stETH in return (which represents your staked tokens plus rewards paid by the Ethereum network). How can you trade them? Well, one easy way is the ETH+stETH on Curve Finance.
Curve Finance is a popular decentralized finance platform that allows users to swap tokens with very low fees and slippage. The platform uses an automated market maker model, which allows anyone to deposit liquidity on the exchange and receive trading fees.
Curve pools generate fees based on trading activity, so if The Merge causes an uptick in people looking to trade using the ETH+stETH pool, these pools will see an increase in fees for liquidity providers. Further, Lido DAO is offering to pay people who provide liquidity to their ETH+stETH pool an extra 4% APY in LDO tokens.
Optimism and Metis
Optimism (OP) and Metis (METIS) are Layer 2s (L2s), which means they are built on top of Ethereum’s blockchain to ease congestion on the Ethereum mainnet. There are several L2s already functional, Arbitrum being one of the most popular, but Optimism and Metis have some of the more developed token ecosystems, and are therefore more likely to benefit from Merge-based bullishness.
While layer 2s don’t benefit directly from The Merge, they can pick up some momentum from their close association with Ethereum. This is because of the attention economy effect, which in crypto refers to the loose principle that whatever commands the most attention also commands the most capital flow. Indeed, both OP and METIS are up 50% this month.
