The Ethereum network’s most significant technical upgrade to date could be beneficial for more than just ETH.
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Shutterstock cover by amiak (edited by Mariia Kozyr)
Key Takeaways
If Ethereum’s “Merge” event is successful, ETH should benefit. But there are many other lesser-known projects and tokens that could end up outpacing 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.
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Source: cryptobriefing.com