Key Takeaways
- Ethereum is scheduled to ship its landmark “Merge” occasion in September, which ought to bode properly for ETH.
- A number of Ethereum-adjacent initiatives with smaller market capitalizations might additionally see the profit and find yourself outpacing ETH following a profitable Merge.
- Liquid staking, NFTs, MEV, infrastructure, and Layer 2 are among the key areas to look at intently.
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If Ethereum’s “Merge” occasion is profitable, ETH ought to profit. However there are numerous different lesser-known initiatives and tokens that would outpace the second-ranked cryptocurrency as soon as the Merge ships.
Lido Finance and Liquid Staking Protocols
Lido Finance is likely one of the most well-publicized initiatives that would profit from the Merge.
Lido lets customers stake their ETH with Ethereum Beacon Chain validators whereas nonetheless retaining their funds liquid. It does this by issuing an equal quantity of stETH representing yield producing ETH Beacon Chain deposits. By means of Lido, stETH holders at the moment make round 4% APY.
Nevertheless, after the Merge, the returns for staking ETH are set to extend considerably. The present yield consists solely of block rewards distributed by the Ethereum protocol. Nevertheless, as soon as the Ethereum community “merges” its Proof-of-Work chain with its Proof-of-Stake Beacon Chain, all transactions will likely be processed by staking validators. This implies all precedence charges at the moment despatched to PoW miners will as an alternative be distributed to PoS validators, rising staking yields.
Digital asset investor CoinShares’ base case is that ETH staking yields should at least double after the Merge whereas additionally making a extra optimistic prediction of returns as excessive as 10 to 12%. Elevated yields ought to lead to extra demand for ETH staking, in the end benefiting Lido.
As the one solution to get publicity to Lido is thru its LDO governance token, many merchants have purchased it as a guess on the Merge being profitable. Moreover, there may be hypothesis {that a} portion of the charges generated by Lido might be distributed to token holders sooner or later, turning LDO into an asset with an actual yield.
In fact, whereas Lido is essentially the most well-known liquid staking protocol, it’s not the one one. Rocket Pool and Stakewise, two smaller however well-established protocols, additionally stand to learn from the Merge for a similar causes as Lido.
Manifold Finance
Subsequent up is Manifold Finance, a protocol creating key post-Merge infrastructure for the Ethereum community.
Manifold is a middleware protocol that separates block constructing and block validation into two distinct actions. At present, Ethereum miners are liable for compiling transactions into legitimate blocks and making an attempt to mine them utilizing their hashpower. Nevertheless, after the Merge, separate entities will be capable to compile transactions into blocks and validate blocks, leaving house for a brand new “block builder” stakeholder within the Ethereum validation sub-economy.
The protocol takes benefit of this by aggregating a number of endpoints akin to Flashbots and Eden Community whereas sustaining direct entry to particular person mining swimming pools or validator nodes. Totally different entities can compete to construct every Ethereum block utilizing their very own maximal extractable worth methods; then, validators can select the one they want to validate based mostly on whichever is essentially the most worthwhile. Block builders assist validators discover essentially the most optimum blocks to validate, and each events revenue from the interplay.
Manifold earns income from providing its providers, which will get distributed to those that stake the protocol’s FOLD token. If the Merge is profitable, Manifold’s staking income ought to improve as extra block builders and validators reap the benefits of the protocol’s tooling.
Optimism and Layer 2 Networks
Third on the listing is Optimism, an Ethereum Layer 2 community with a tradable token on the open market.
As Layer 2 networks like Optimism depend on Ethereum mainnet for safety and validation, the Merge ought to enhance them in a number of methods. For instance, the adoption of Proof-of-Stake ought to improve mainnet safety and thus Layer 2 safety. Furthermore, the transfer away from Proof-of-Work mining is anticipated to slash Ethereum’s power consumption by over 99% and enhance Optimism’s inexperienced credentials.
Nevertheless, a extra Layer 2 particular profit comes from a subsequent Ethereum improve that the Merge makes potential–EIP-4488. At present, Layer 2 networks like Optimism “roll up” transactions into “batches,” that are despatched again to Ethereum mainnet together with numerous calldata for validation. The 4488 proposal seeks to scale back the price of posting this calldata on mainnet, lowering the amortized value of transactions on Layer 2. In consequence, Layer 2 transactions develop into even cheaper.
If the Merge is profitable and EIP-4488 is carried out, fuel charges on Layer 2 might lower fivefold. This may seemingly make transacting on Layer 2 much more engaging, driving use and demand for Layer 2 native tokens like OP.
It’s price remembering that EIP-4488 gained’t simply cut back charges on Optimism—different Layer 2 networks akin to Arbitrum, Metis, and the upcoming zkSync and StarkNet rollups can even profit. Nevertheless, as Optimism is at the moment essentially the most used Layer 2 with a token (Arbitrum hasn’t but launched one), it stands to learn essentially the most from a profitable Ethereum Merge.
Ethereum NFTs
The following entry on the listing may seem to be an outlier, however there’s a robust thesis behind it. As a substitute of a specific token or protocol, we’re NFTs on Ethereum as an asset class that would outpace ETH within the occasion of a profitable Merge.
ETH might recognize post-Merge due to increased staking yields and a substantial drop in issuance. When the value of ETH will increase, the value of in-demand Ethereum NFTs tends to development in the identical path. On this approach, Ethereum NFTs might be seen as a leveraged guess on ETH.
Psychological components seemingly play an necessary function on this market dynamic. When ETH surges, holders really feel richer than they beforehand did. And when individuals really feel wealthy, they wish to spend their cash (on this case, ETH) on issues that exhibit their wealth—particularly NFTs.
Others have additionally noticed how NFTs act as a type of Veblen good, an asset that defies the everyday legal guidelines of provide and demand and sees elevated demand as its worth will increase. These two components mixed present an evidence as to why Ethereum NFTs have beforehand outpaced spot ETH throughout market rallies.
Not any and each Ethereum NFT assortment will profit from these results, although. In the event you’re planning to guess on NFTs as a leveraged ETH play, it’s seemingly greatest to stay to initiatives with a confirmed monitor report. For avatar NFTs, established collections like Bored Ape Yacht Membership or CryptoPunks are more likely to be the most secure choices. Different NFTs that ought to do properly embrace top-tier generative artwork from names like Tyler Hobbs and Dmitri Cherniak.
Eden Community
The ultimate venture that would find yourself outpacing ETH following the Merge is a bit more speculative than the others, but it surely has robust fundamentals to again it up. Eden Network is a maximal extractable worth (MEV) safety protocol with shut ties to many outstanding gamers within the Ethereum validation system.
At present, the protocol works with Ethereum miners to forestall its customers from having their transactions front-run or sandwich attacked by these executing MEV methods. By staking the EDEN token, customers are granted increased precedence for his or her transactions and likewise acquire entry to Eden Community’s personal relayers.
Nevertheless, when Ethereum transitions to Proof-of-Stake, the core performance that put Eden Community on the map will disappear. Thankfully, the protocol has lengthy recognized this and has ready to pivot its providers for a post-Merge Ethereum. After the Merge, Eden will work with different protocols akin to Manifold Finance to extend block manufacturing effectivity whereas guaranteeing its customers’ transactions are protected from MEV. Moreover, Eden is constructing a brand new product to assist maximize the yield customers can generate from liquid staking tokens. The protocol has developed its personal unique yield generation engine, which is at the moment deployed on Avalanche in partnership with Yield Yak and Geode Finance.
If the Merge is profitable, Eden plans to deploy its yield era structure on Ethereum, working with well-liked liquid staking platforms akin to Lido and Rocket Pool to maximise returns for finish customers. Whereas these developments gained’t have an effect on Eden’s tokenomics construction, they might probably improve the protocol’s utilization. Like Lido, if a robust narrative can kind round Eden Community, its token will seemingly act as a proxy guess for the protocol and may see a rise in worth.
Disclosure: On the time of scripting this characteristic, the writer owned ETH, FOLD, and a number of other different cryptocurrencies.