The Merge — How to take advantage
The Ethereum merge has been a much talked about event. The Ethereum Merge is expected to be completed by the Third Quarter of 2022 ( around September ish but don’t quote us on that 😅)
The merge will change the way the Ethereum network is secured. The consensus and security model of Ethereum, since the inception of the blockchain, had been the proof-of-work model. In December 2020, however the beacon chain was launched, serving as the consensus layer using the proof-of-stake model. The merge is an event that seeks to change the consensus and security model of Ethereum from a proof-of-work to a proof-of-stake model. Before going over the merge results, it is vital to understand the proof-of-work and proof-of-stake model.
Source: Ethereum
Proof-of-work is a security model where miners compete to solve mathematical, cryptographic puzzles for block rewards. Proof-of-work thus requires a great deal of energy consumption since miners use computers requiring large amounts of energy.
On the other hand, proof-of-stake implements a validator system where a random validator is chosen to verify a transaction and receives a small reward after every transaction.
Some key events that will happen as a result of the merge include:
After the merge, Ethereum will become more eco-friendly. The merge will reduce the energy consumption of the Ethereum blockchain by 99.95%.
There will be a more than 90% decrease in the annual issuance of new Ethereum tokens and eventually we might see ETH become deflationary via negative issuance.
Upon completion of the merge, withdrawal of staked Ethereum tokens will not be allowed for approximately six to twelve (6-12) months until the Shanghai upgrades are completed.
The merge will allow Ethereum to implement plans for sharding. This will enable the Ethereum network to process transactions in more manageable and scalable ways.
So what's the catch?
Immediately after the merger, for at least six (6) months, users cannot withdraw staked Ethereum tokens until the Shanghai update. At Fifty Finney, we believe some investment opportunities will arise due to the lock on withdrawals. In addition, we believe that protocols that support the staking of Ethereum tokens should capture some upside immediately after the merge is completed. Thus, aside from buying ETH and staking it or buying staked ETH tokens, we believe staking protocols like Lido Finance, Rocket Pool, StakeWise, and StaFi, amongst others, may be poised for growth.
Let us review a few of these staking protocols:
Lido Finance
Lido Finance is a liquid staking protocol that allows users to stake tokens and receive yields generated from validator networks and network fees. Thus, users can stake Ethereum(ETH) and receive Lido Staked Ethereum (stETH) on a 1:1 basis. In addition, Lido Finance has a governance token called Lido DAO ($LDO). The LDO token provides an excellent opportunity for investors going into the merge. At this time, there is $5 billion worth of ETH tokens staked on Lido Finance, the largest staking pool. LDO currently, has a fully diluted market cap of approximately $600 million, bringing the total value locked to fully diluted value ratio of 8.3.
Rocket Pool
Like Lido Finance, rocket pool is a liquid staking protocol. Users can deposit ETH and receive rocket ETH (rETH). Users who deposit up to 16ETH tokens can run a node and receive a higher yield in addition to rocket pool (RPL) tokens. The Rocket Pool token, RPL, has a fully diluted value of approximately $200m. With the roughly 200,000 ETH tokens staked at a current ETH value of 1,100. It will bring the total value locked to fully diluted value of 1.
StakeWise
Stakewise is another liquid staking. On Stakewise, users can deposit ETH and receive Stakewise Ethereum (sETH2). The Stakewise token, SWISE, currently has a fully diluted market cap of $60m, while the total Ethereum staked on the protocol totals about $60m. This brings the total value locked to a fully diluted value ratio of 1.
Final Thoughts.
Going by the total value locked to a fully diluted value ratio, we can see that Lido has a higher upside. However, crypto can be unpredictable, and often actors can be irrational; thus, we encourage you to do your research and draw your conclusions. Nevertheless, seeing as the market is in a downturn, we think that the merge event might provide an opportunity for investors to make splendid returns.