The Ethereum network’s most
significant technical upgrade to date could be beneficial for more than just
ETH.
Key Takeaways
Ethereum is scheduled to
ship its landmark "Merge" event in September, which should bode well
for ETH.
Several
Ethereum-adjacent projects with smaller market capitalizations could also see
the benefit and end up outpacing ETH following a successful Merge.
Liquid staking, NFTs,
MEV, infrastructure, and Layer 2 are some of the key areas to watch closely.
If Ethereum’s “Merge”
event is successful, ETH should benefit. But there are many other lesser-known
projects and tokens that could outpace the second-ranked cryptocurrency once
the Merge ships.
Lido Finance
and Liquid Staking Protocols
Lido Finance is one
of the most well-publicized projects that could benefit from the Merge.
Lido lets users stake their ETH
with Ethereum Beacon Chain validators while still keeping their funds liquid.
It does this by issuing an equal amount of stETH representing yield generating
ETH Beacon Chain deposits. Through Lido, stETH holders currently make around 4%
APY.
However, after the Merge, the
returns for staking ETH are set to increase significantly. The current yield
consists solely of block rewards distributed by the Ethereum protocol. However,
once the Ethereum network “merges” its Proof-of-Work chain with its
Proof-of-Stake Beacon Chain, all transactions will be processed by staking
validators. This means all priority fees currently sent to PoW miners will
instead be distributed to PoS validators, increasing staking yields.
Digital asset investor
CoinShares’ base case is that ETH staking yields should at least double after
the Merge while also making a more optimistic prediction of returns as high as
10 to 12%. Increased yields should result in more demand for ETH staking, ultimately
benefiting Lido.
As the only way to get exposure
to Lido is through its LDO governance token, many traders have bought it as a
bet on the Merge being successful. Additionally, there is speculation that a
portion of the fees generated by Lido could be distributed to token holders in
the future, turning LDO into an asset with a real yield.
Of course, while Lido is the
most well-known liquid staking protocol, it’s not the only one. Rocket Pool and
Stakewise, two smaller but well-established protocols, also stand to benefit
from the Merge for the same reasons as Lido.
Manifold
Finance
Next up is Manifold
Finance, a protocol developing key post-Merge infrastructure for the
Ethereum network.
Manifold is a middleware
protocol that separates block building and block validation into two distinct
activities. Currently, Ethereum miners are responsible for compiling
transactions into valid blocks and attempting to mine them using their
hashpower. However, after the Merge, separate entities will be able to compile
transactions into blocks and validate blocks, leaving space for a new “block
builder” stakeholder in the Ethereum validation sub-economy.
The protocol takes advantage of
this by aggregating multiple endpoints such as Flashbots and Eden Network while
maintaining direct access to individual mining pools or validator nodes.
Different entities can compete to build each Ethereum block using their own
maximal extractable value strategies; then, validators can choose the one they
wish to validate based on whichever is the most profitable. Block builders help
validators find the most optimal blocks to validate, and both parties profit
from the interaction.
Manifold earns revenue from
offering its services, which gets distributed to those who stake the protocol’s
FOLD token. If the Merge is successful, Manifold’s staking revenue should
increase as more block builders and validators take advantage of the protocol’s
tooling.
Optimism and
Layer 2 Networks
Third on the list is Optimism, an Ethereum
Layer 2 network with a tradable token on the open market.
As Layer 2 networks like
Optimism rely on Ethereum mainnet for security and validation, the Merge should
boost them in several ways. For example, the adoption of Proof-of-Stake should
enhance mainnet security and thus Layer 2 security. Moreover, the move away
from Proof-of-Work mining is expected to slash Ethereum’s energy consumption by
over 99% and improve Optimism’s green credentials.
However, a more Layer 2 specific
benefit comes from a subsequent Ethereum upgrade that the Merge makes
possible–EIP-4488. Currently, Layer 2 networks like Optimism “roll up”
transactions into “batches,” which are sent back to Ethereum mainnet along with
various calldata for validation. The 4488 proposal seeks
to reduce the cost of posting this calldata on mainnet, reducing the amortized
cost of transactions on Layer 2. As a result, Layer 2 transactions become even
cheaper.
If the Merge is successful and
EIP-4488 is implemented, gas fees on Layer 2 could decrease fivefold. This
would likely make transacting on Layer 2 even more attractive, driving use and
demand for Layer 2 native tokens like OP.
It’s worth remembering that
EIP-4488 won’t just reduce fees on Optimism—other Layer 2 networks such as
Arbitrum, Metis, and the upcoming zkSync and StarkNet rollups will also
benefit. However, as Optimism is currently the most used Layer 2 with a token
(Arbitrum hasn’t yet launched one), it stands to benefit the most from a
successful Ethereum Merge.
Ethereum NFTs
The next entry on the list might
seem like an outlier, but there’s a strong thesis behind it. Instead of a
particular token or protocol, we’re looking at NFTs on Ethereum as an asset
class that could outpace ETH in the event of a successful Merge.
ETH could appreciate post-Merge
thanks to higher staking yields and a considerable drop in issuance. When the
price of ETH increases, the price of in-demand Ethereum NFTs tends to trend in
the same direction. In this way, Ethereum NFTs can be viewed as a leveraged bet
on ETH.
Psychological factors likely
play an important role in this market dynamic. When ETH surges, holders feel
richer than they previously did. And when people feel rich, they like to spend
their money (in this case, ETH) on things that show off their wealth—namely
NFTs.
Others have also observed how
NFTs act as a kind of Veblen good, an asset that
defies the typical laws of supply and demand and sees increased demand as its
price increases. These two factors combined provide an explanation as to why
Ethereum NFTs have previously outpaced spot ETH during market rallies.
Not any and every Ethereum NFT
collection will benefit from these effects, though. If you’re planning to bet
on NFTs as a leveraged ETH play, it’s likely best to stick to projects with a
proven track record. For avatar NFTs, established collections like Bored Ape
Yacht Club or CryptoPunks are likely to be the safest options. Other NFTs that
should do well include top-tier generative art from
names like Tyler Hobbs and Dmitri Cherniak.
Eden Network
The final project that could end
up outpacing ETH following the Merge is a little more speculative than the
others, but it has strong fundamentals to back it up. Eden
Network is a maximal extractable value (MEV) protection
protocol with close ties to many prominent players in the Ethereum validation
system.
Currently, the protocol works
with Ethereum miners to prevent its users from having their transactions
front-run or sandwich attacked by those executing MEV strategies. By
staking the EDEN token, users are granted higher priority for their
transactions and also gain access to Eden Network’s private relayers.
However, when Ethereum
transitions to Proof-of-Stake, the core functionality that put Eden Network on
the map will disappear. Fortunately, the protocol has long known this and has
prepared to pivot its services for a post-Merge Ethereum. After the Merge, Eden
will work with other protocols such as Manifold Finance to increase block
production efficiency while ensuring its users’ transactions are safe from MEV.
Additionally, Eden is building a new product to help maximize the yield users
can generate from liquid staking tokens. The protocol has developed its own unique yield generation engine,
which is currently deployed on Avalanche in partnership with Yield Yak and
Geode Finance.
If the Merge is successful, Eden
plans to deploy its yield generation architecture on Ethereum, working with
popular liquid staking platforms such as Lido and Rocket Pool to maximize
returns for end users. While these developments won’t affect Eden’s tokenomics
structure, they could potentially increase the protocol’s usage. Like Lido, if
a strong narrative can form around Eden Network, its token will likely act as a
proxy bet for the protocol and should see an increase in value.
Disclosure: At the time of writing this
feature, the author owned ETH, FOLD, and several other cryptocurrencies.
Source: cryptobriefing.com