In the face of Ethereum mergers, what participation strategies do investors have?

Author: Ben Giove

Source: Bankless

With the successful merger of the Goerli test network, the merger of Ethereum is expected to come between September 15-16, and the TTD (Terminal Total Difficulty) of the main network is 5875000000000000000.

The benefits of mergers have been over-discussed, but legitimate. After all, the merger is one of the most important catalysts in the history of Ethereum, which will affect the entire network in multiple ways.

For example, the merger would significantly reduce ethereum’s energy consumption, assuaging critics’ concerns about its environmental impact and making the asset more attractive to ESG-conscious institutional investors.

The merger would also clear the way for other changes to ethereum at the protocol level, such as the separation of proposers from builders. This helps democratize MEV extraction by separating block production and block validation, and EIP-4844, which will reduce transaction costs for rollups by an order of magnitude.

Finally, the merger will greatly increase the attractiveness of ETH assets. Issuance of ETH will be reduced by about 90%, potentially causing deflation, while also providing stakers with the ability to earn yield on their holdings.

The most obvious way to get a feel for this momentous event is to buy ETH. For investors, there are many other ways to get involved.

Here are four different ways investors can invest with ETH Merger. These contents are for informational purposes only and do not constitute any investment advice.

1️. Liquidity Staking

For example: LDO, RPL, SWISE

Liquidity staking services are the most immediate beneficiaries of this merger, with non-custodial protocols likely to see significant growth in the months following the transition to PoS.

The value proposition of liquid staking is simple — it allows users to do three things at the same time: maintain custody of collateral, earn staking rewards, and deploy assets within DeFi by issuing liquid staking derivatives (LSDs).

The merger will greatly accelerate the development of these protocols, as it will reduce staking risk by eliminating technical and execution risk prior to the merger.

Additionally, completion of the merger and a clearer withdrawal schedule will also help reduce the discount of LSD relative to ETH. Lido's stETH is currently worth about 0.963 ETH, but when I wrote about Celsius' implosion in June, stETH was only

0.933ETH, seriously decoupled from ETH.

Admittedly - Beacon chain withdrawals will not be enabled until the Shanghai network upgrade, which is expected to be about 6-12 months after the merger. But the size of the merger will reduce this discount, making using these protocols more attractive for staking, since it means depositors take on less price risk.

In addition, due to the increase in staking income, deposits in liquid staking agreements will also increase. Right now, Beacon Chain validators only earn block rewards. After the merger, stakers will be able to earn transaction fees and income from MEV. This is expected to significantly increase investment yields from about 4% currently to 6-12%.

These growth drivers should also increase revenues for liquid staking protocols, as deposits, higher yields, and possibly higher ETH prices will boost their revenues.

There are currently three liquidity staking protocols for publicly traded tokens: Lido (LDO), Rocket Pool (RPL), and Stakewise (SWISE).

Each token serves a different role in the portfolio:

1. Investors looking for exposure to blue chips can look to LDO as it is the largest entity on the Beacon Chain with a 31.2% share of deposits. Lido has a 90.3% market share in this segment and an even larger share in the liquid staking space. The token currently has a market cap of $1.48 billion and a fully diluted valuation (FDV) of $2.7 billion.
2. Token economics-oriented investors might look to Rocket Pool’s RPL, the second largest liquidity staking protocol with a 1.6% share of beacon chain deposits and a 4.5% share in the liquidity staking partition, The market cap is $467.52 million and the FDV is $519.3 million. RPL has unique token economics among minipool operators. Operators or entities validating through Rocket Pool need to purchase RPL worth 1.6 ETH for each new validator, linking token demand with RPL growth .
3. Investors who want to maximize risk and optimize beta can focus on StakeWise (SWISE), which has a market cap of $26.66 million and an FDV of $189.45 million. While the protocol accounts for only 0.4% and 1.3% of the beacon chain and liquidity deposits, it is probably the highest beta token of the three due to its small size and low volatility.

2️. Betting on event-based DeFi

Purchasing tokens is not the only way to participate in the merger. Savvy market participants can use DeFi in a variety of different ways to “trade narratives” and express their views on how different markets will react before, during, and after.

Users can do this by lending and lending ETH on money markets like Aave, Compound, and Euler. Why? There will likely be a considerable increase in the need to borrow ETH during the merger, as investors will want to accumulate as much assets as possible in order to receive more "airdrops" from a potential PoW-based Ethereum fork (ETHPOW).

Since the rates on these agreements are based on usage (i.e., how much of the asset is borrowed), a massive spike in borrowing demand would result in incredibly high interest rates on deposits for lenders. The interest rate curve for ETH on Aave V2 begins to "kink" or accelerate rapidly when usage reaches 70%. The market is currently at 61.56% utilization, up significantly since August 8th, and that could certainly happen.

Source: Aave

Of course, this strategy is not without risk. In extreme cases, there is extremely high borrowing demand, which means that there is little ETH liquidity in Aave, and lenders may be temporarily unable to withdraw assets until borrowers repay or more deposits are flooded into the protocol.

The second way to use DeFi to express a view on merger-related events is to use Voltz Protocol, an AMM for interest rate swaps, to bet on LSD’s staking yield.

With the potential for increased return on investment after the merger, market participants can use Voltz by depositing ETH as margin and purchasing variable rate stETH or rETH tokens. Users can use leverage to amplify their returns, but this puts them at risk of liquidation. Use any kind of leverage with caution.

3️. Earn PoW airdrop income

The mining industry is at risk of losing billions of dollars, while there will almost certainly be a PoW hard fork of Ethereum following the merger. Some exchanges have already committed to support this hard fork and plan to list ETHPOW tokens.

While it’s unclear whether the chain will have any long-term viability, or how much value ETHPOW will have, there are still a number of different ways users can get themselves involved and earn free airdrops.

The easiest way to qualify for an air investment is to put ETH into a non-custodial wallet (Metamask, Coinbase wallet, etc.).

But if you're looking for a riskier opportunity, one approach is to borrow ETH on the money market, which can be profitable if the value of the airdrop is greater than the cost of borrowing ETH. However, this strategy also has considerable risks. Not only would the borrowing rate potentially outweigh any gains from the airdrop, but borrowers would also be liquidated if the price of ETH spiked, or the value of their collateral dropped. Given the high potential for massive volatility on the day of the merger, investors need to proceed with extreme caution.

Another way investors can airdrop without taking any price risk is by using perpetual futures to create a delta-neutral ETH position. In order to do this, users will buy spot ETH while shorting an equivalent amount of ETH using a perpetual contract on a CEX or DEX. In this way, users can take positions in ETH so they can earn airdrops without taking the price risk that comes with holding the asset. This strategy can be profitable if the value of the airdrop exceeds the capital (the cost of maintaining a position in a perpetual futures contract).

However, there is no free lunch in the world. This strategy is very risky, because funds (such as borrowing rates) may rise sharply in Merge. Any kind of leveraged strategy like this, coupled with volatility, puts users at significant risk of being liquidated.

4️. Become a follow-up beneficiary

In the end, a merged Ethereum will have a transformative impact on the rest of the Ethereum economy.

One of the beneficiaries is Layer 2 (L2), as the transition to PoS will pave the way for scalability upgrades (e.g. EIP-4844), which will drastically reduce end-user rollup by reducing the cost of storing call data on-chain. transaction fees. This fee reduction helps facilitate L2 adoption by increasing the number of users who can transact on the network and unlocking the ability to create new, novel dapps.

Investors can (and have already begun) to benefit from the merger by investing in the entire L2 ecosystem, such as the L2 base layer (OP), or L2 native DeFi primitives, such as Synthetix (SNX) and GMX (GMX), or different ecosystems Smaller market capitalization projects native to the system. Don't forget to support L2 infrastructure like fast bridging services like Synapse (SYN) and Hop Protocol (Hop).

Another industry that will change after the merger is MEV. The competitive dynamics of MEV will change dramatically with the implementation of the proposer-builder separation, which will separate block production (determining which transactions go in a block) from block validation.

There are many publicly traded token projects in the MEV stack that allow you to participate in investing in the Ethereum merger event. Such as Manifold Finance (FOLD) Rook Protocol (ROOK) and Cow Protocol (COW).

While these coins have run in large numbers in recent weeks, they will still be long-term beneficiaries of PoS Ethereum.

Summary: Choose the adventure that suits you

Mergers are coming fast and are expected to bring major changes to the Ethereum economy, as well as short-term on-chain chaos.

The safest way to invest is to buy ETH directly.

But it’s not the bear market of 2018 anymore, we live in the world of DeFi now, so in the face of the merger of Ethereum, investors can participate in many other ways, whether it is through investing/trading liquidity in the L2 and MEV space The pledge agreement, or become a long-term beneficiary of the merger, or earn income by using DeFi, or earn ETHPOW airdrops.

What we should pay attention to is to choose the way that suits us, and always pay attention to risks.