🆁🅴🅲🅴🅸🆅🅴 🆂🅴🅽🆂🅴 🅼🅴🅳🅸🅰 — Issue #13- The Ethereum Merge Trade on a Glance: Our Best Tips
The Ethereum merger is the dominant story in the space. Why should it not be?
Given the importance of ESG in global finance, switching from the existing energy-intensive Proof of Work (PoW) mechanism to an environmentally friendly Proof of Stake (PoS) mechanism is a significant step forward. Furthermore, the event is commonly referred to as “triple halvening” due to the reduction in ETH issuance post-merge from 4.3 percent to around 0.22 percent annually. Long-term sustainability and reduced token inflation should benefit the ETH price.
The focus of today’s newsletter is on the “merge trade.” The merge trade covers price action driven by the event’s hype. It also affects other projects in addition to ETH. I’ll go over a few of them below.
The tentative date for the merger is September 19, 2022, according to notes from leading Ethereum developer Tim Beiko. You may benefit from being aware of these opportunities over the next two months.
Lido is a DeFi platform that allows users to pool their ETH stakes on the Beacon Chain. This allows users who do not have the required 32 ETH to participate in the staking process. Lido also retains access to staked ETH as stETH. Staking on the Beacon Chain is otherwise one-way, with no withdrawals.
Because of the market downturn and concerns about a Celsius sell-off, stETH was recently trading at a significant discount to ETH. However, since Celsius declared bankruptcy and allayed fears of further sales, things have improved. Since the announcement of the merger, the discount in stETH has decreased from 0.96 percent to 0.98 percent, nearly bringing it to parity with ETH.
The news of the merger benefited the Lido DAO token (LDO). The token’s value increased from $0.9 to $1.6. Still, if the plan is to exit slightly before the merger, LDO may present a good buying opportunity in the coming weeks.
Rocket Pool is similar to Lido, but on a smaller scale. The team recently implemented changes to improve the project’s capital efficiency. They reduced the minimum requirements for running an ETH validator node from 16 ETH to 4 ETH and introduced Staking-as-a-Service for institutional clients.
Rocket Pool’s native token, RPL, has increased by 56.7 percent since the merge date was announced. RPL is a good choice for those betting on the merger trade to continue due to the team’s timely upgrade and the resulting price action.
The Ethereum Classic merge trade narrative is that it will provide a safe haven for existing Ethereum miners. The event has provided an opportunity for ETC supporters to sell the concept of “real Ethereum,” as they did following the DAO hack. Since the announcement of the merger date, ETC has increased by 45 percent as it has gained traction on social media.
ETC could serve as a safeguard against a technical snafu during the merger, which is not impossible given the difficulties of switching from one consensus mechanism to another. If bugs are discovered during the event, the ETC price may skyrocket. It should also help competing Layer-1 blockchain chains such as Avalanche and Solana.
The Ethereum Classic hedge narrative should be very short-lived as long as the developer community and institutional money remain focused on Ethereum. However, it’s still a good short-term bet.
So what is new with the Merge.
Vitalik Buterin claims that #Ethereum will be able to to process “100,000 transactions per second”, following the completion of 5 key phases:
• The Merge
• The Surge
• The Verge
• The Purge
• The Splurge
A quick breakdown of what each stage means for $ETH.
1. THE MERGE
The consolidation of the execution layer (current mainnet) and the Beacon Chain (new POS layer).
• It is now a deflationary asset (reduced issuance)
• Reduces power consumption by 99%
This upgrade is currently scheduled for September 19th, 2022.
2. THE SURGE (2023)
The implementation of Sharding on Ethereum.
Sharding is the process of dividing a blockchain’s entire network into smaller partitions known as “shards.”
This will greatly improve the network’s scalability.
3. THE VERGE
Verkle trees are introduced as a “powerful upgrade to Merkle proofs that allows for much smaller proof sizes.”
This will optimize Ethereum storage and help reduce node size. Ultimately, this helps $ETH become more scalable.
4. THE PURGE
Reduces the amount of hard drive space required for validators. This removes all historical data and bad debt.
Storage is streamlined, which reduces network congestion.
5. THE SPLURGE
Following the previous four stages, a series of miscellaneous *smaller* upgrades are performed to ensure the network runs smoothly.