If Ethereum’s “The Merge” event is a success, ETH should benefit. But there are many other lesser-known projects and tokens that could end up outperforming the second-tier crypto-currency once the merge goes live.
Lido Finance and liquid staking protocols
Lido Finance is one of the more high-profile projects that could benefit from the merger.
Lido allows users to bet their ETH with Ethereum Beacon Chain validators while keeping their funds liquid. It does this by issuing an equal amount of stETH representing ETH Beacon Chain deposits generating yield. Through Lido, stETH holders currently earn an annual return of about 4%.
However, after the merger, returns on ETH deposits are expected to increase significantly. The current yield consists only of the block rewards distributed by the Ethereum protocol. However, once the Ethereum network has “merged“Its Proof-of-Work chain with its Beacon Proof-of-Stake chain, all transactions will be processed by staking validators. This means that all priority fees currently sent to PoW miners will instead be distributed to PoS validators, increasing staking returns.
The base case for the CoinShares digital asset investor is that ETH staking returns should at least double after the merger while making a more optimistic prediction of returns as high as 10-12%. The increase in yields should lead to an increase in demand for ETH staking, which will ultimately benefit Lido.
Since the only way to gain exposure to Lido is through its LDO governance token, many traders have bought it to bet on the success of the merger. In addition, there is speculation that a portion of the fees generated by Lido may be distributed to token holders in the future, turning LDO into an asset with a real return.
Of course, while Lido is the most well-known liquid staking protocol, it is not the only one. Rocket Pool and Stakewise, two smaller but well-established protocols, should also benefit from the merger for the same reasons as Lido.
The next project is Manifold Finance, a protocol developing a post-merger key infrastructure for the Ethereum network.
Manifold is a middleware protocol that separates the construction and validation of blocks into two separate activities. Currently, Ethereum miners are responsible for compiling transactions into valid blocks and attempting to mine them using their power. However, after the merger, separate entities will be able to compile block transactions and validate blocks, making way for a new stakeholder “block builder” in the Ethereum validation sub-economy.
The protocol takes advantage of this situation by aggregating multiple endpoints such as Flashbots and Eden Network, while maintaining direct access to individual mining pools or validation nodes. Different entities can compete to build each Ethereum block using their own maximum extractable value strategies, then validators can choose which one they want to validate based on which one is more profitable. Block builders help validators find the most optimal blocks to validate, and both parties benefit from this interaction.
Manifold earns revenue by offering its services, which are distributed to those who bet on the protocol’s FOLD token. If the merger is successful, Manifold’s revenues should increase as block builders and validators take advantage of the protocol’s tools.
Optimism and Layer 2 Networks
Third on the list is Optimism, a Layer 2 Ethereum network with an open market tradable token.
Because Level 2 networks such as Optimism depend on the Ethereum core network for security and validation, the merger should boost them in several ways. For example, the adoption of Proof-of-Stake should enhance the security of the mainnet and thus the security of layer 2. In addition, the move away from Proof-of-Work mining is expected to reduce Ethereum’s energy consumption by over 99% and improve Optimism’s green credentials.
However, a more specific Layer 2 benefit comes from a later upgrade to Ethereum that the merger makes possible – EIP-4488. Currently, Layer 2 networks such as Optimism ” group ” transactions in ” lots “, which are sent back to the Ethereum core network with various call data for validation. Proposal 4488 aims to reduce the cost of posting this call data to the main network, thereby reducing the amortized cost of Layer 2 transactions. As a result, Layer 2 transactions become even cheaper.
If the merger is successful and EIP-4488 is implemented, gas charges on Layer 2 could be divided by five. This would likely make Layer 2 transactions even more attractive, stimulating the use of and demand for native Layer 2 tokens as OPs.
It is worth remembering that EIP-4488 will not only 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 Tier 2 network with a token (Arbitrum has not yet launched one), it will benefit the most from a successful Ethereum merger.
The next entry on the list may seem like an outlier, but there is a strong thesis behind it. Instead of a particular token or protocol, we see NFTs on Ethereum as an asset class that could surpass ETH in the event of a successful merger.
ETH could appreciate post-merger due to higher staking yields and significantly lower issuance. When the price of ETH rises, the price of Ethereum NFTs, which are in high demand, tends to follow the same trend. In this way, Ethereum NFTs can be considered a leveraged bet on ETH.
Psychological factors likely play an important role in these market dynamics. When ETH soars, holders feel richer than before. And when people feel rich, they like to spend their money (in this case, ETH) on things that show their wealth – namely, NFTs.
Others have also observed how NFTs act as a kind of Veblen Good, an asset that defies the usual laws of supply and demand and sees demand increase as its price rises. These two factors combined explain why Ethereum NFTs have previously outperformed cash ETH in market rallies.
Not all Ethereum NFT collections will benefit from these effects, however. If you’re considering betting on NFTs as a leveraged ETH play, it’s probably best to stick with proven projects. For avatar NFTs, established collections like Bored Ape Yacht Club or CryptoPunks are probably the safest options. Other NFTs that should do well include high-level generative art from names like Tyler Hobbs and Dmitri Cherniak.
The latest project that could end up overtaking ETH after the merger is a bit more speculative than the others, but it has solid fundamentals to back it up. Eden Network is a maximum extractable value (MEV) protection protocol that has close ties to many of the major players in Ethereum’s validation system.
Currently, the protocol works with Ethereum’s miners to prevent its users from having their transactions pre-empted or sandwiched by those executing MEV strategies. By staking the EDEN token, users receive higher priority for their transactions and also have access to the Eden Network’s private relays.
However, when Ethereum moves to Proof-of-Stake, the core functionality that put Eden Network on the map will disappear. Fortunately, the protocol has known this for a long time and has been preparing to pivot its services to a post-merger Ethereum. Post-merger, Eden will work with other protocols such as Manifold Finance to increase the efficiency of block production while ensuring that its users’ transactions are safe from SRM. In addition, Eden is building a new product to help maximize the return that users can generate from liquid staking tokens. The protocol has developed its own unique yield generation engine that is currently deployed on Avalanche in partnership with Yield Yak and Geode Finance.
If the merger 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 tokenomic structure, they could potentially increase usage of the protocol. 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.