In the DeFi space, many believe The Merge will have a positive impact on the price of ETH. A smaller contingent is more bearish. Whatever your position, whether you are bullish or bearish on The Merge, Index Coop offers a number of structured products that react to the price of ETH. Your expectations of the price of ETH post-Merge can help inform which products will most help you express your opinion on the effects of The Merge.
There are three significant reasons to believe The Merge will increase the price of ETH: the reduction in energy consumption, the transition of ETH to a deflationary asset, and the expected rise in staking APY.
By terminating Proof-of-Work in favor of Proof-of-Stake, The Merge will reduce Ethereum’s energy consumption by ~99.5%. The reduction in energy consumption will improve the credibility of Ethereum from an ESG (Environmental, Social and Governance) perspective. ESG considerations are top of mind for many investors, according to Paul Farella of Willow Crypto. He says clients raise concerns about the environmental impact of crypto frequently. He reassures his clients that proof-of-stake “replaces energy with money,” leading to a dramatically reduced environmental impact.
The Merge will also significantly alter Ethereum tokenomics, in the opinions of many analysts very likely making ETH deflationary and therefore likely to experience an increase in price post-Merge. There are three ways The Merge will result in ETH becoming a deflationary digital asset: issuance reduction, the implementation of EIP 1559, and a “triple halving.”
Additionally, many commentators expect the ETH staking APY to rise significantly, as Proof-of-Stake will direct transaction fees towards ETH stakers instead of the hardware miners they used to go to during Proof-of-Work. In fact, Coinbase estimates fees to rise from 4.3-5.4% to 9-12%. Lucas Campbell of BanklessDAO highlights the demand-driving effect of a higher staking yield: “In a world where real yields are negative and government bonds offer nothing, Ethereum is offering double-digit real yields. Investors can’t ignore it.” This kind of hype around the possible increase in staking APY may boost the price of ETH.
The Merge also contributes to the very ethos behind Ethereum and DeFi in general: decentralization. The Merge has the potential to turbocharge innovation and adoption by expanding opportunities for participation in the Ethereum network. By the transition to Proof-of-Stake, The Merge offers rewards to those that simply commit their ETH to a staking protocol, with no hardware mining technology required. Hype surrounding the real opportunities contributing to the democratization of the Ethereum network may drive upward price pressure for ETH.
“The Merge brings in a much larger set of opportunities and options for people that want to participate. Any time you open up such a core function like that to so many people and so many different services and opportunities, it bodes well for a network that wants to be decentralized, but also be able to scale,” said Allan Gulley of Index Coop.
If you are bullish on The Merge, products that multiply returns on ETH might be appealing. Index Coop offers two: the Interest-compounding ETH Index and the Ethereum Flexible Leverage Index (ETH2x-FLI, also available on Polygon as ETH2x-FLI-P). If the price of ETH rises post-Merge, these products are constructed with the aim of generating higher returns than pure ETH will.
The Interest-compounding ETH Index (icETH) uses a leveraged liquid staking strategy to amplify exposure to staking yield on ETH. icETH seeks to multiply the staking rate for stETH while minimizing transaction costs and risk associated with maintaining collateralized debt on Aave. If you are bullish on the expected greater yield returns as a result of The Merge, as mentioned by Coinbase, icETH could provide you with exposure to staking yield in advance of The Merge. Additionally, the APY of icETH may increase post-Merge since rewards will go to stakers instead of miners.
The Ethereum Flexible Leverage Index (ETH-2x-FLI) leverages a collateralized debt position on ETH by targeting a long 2x exposure to ETH, available on Mainnet and Polygon. By abstracting the management of a leveraged position into a simple index, these products enable market participants to take on leverage while minimizing the transaction costs and risks associated with maintaining collateralized debt. ETH2x-FLI-P is available for purchase on the Index Coop app, using Flash Mint for lower fees. If you’re bullish on The Merge, these products enable you to make a leveraged bet on ETH’s rising price.
On the other hand, some DeFi thought leaders are hesitant to declare The Merge inherently likely to increase the price of ETH. With a macro bearish backdrop, the price of ETH may not see significant price jumps due to The Merge. “While PoS will change some of Ethereum’s tokenomics, ether’s price – like that of most other cryptocurrencies – is mainly a reflection of general market sentiment,” writes Sam Kessler of CoinDesk. With the bear market expected to last through the end of 2022, market sentiment during The Merge could result in a neutral or even decreased price.
Additionally, The Merge has faced over 6 months of delays caused by failed testing that may alarm some investors. Sam Klemens of Crypto News writes, “It’s disappointing news for everyone who cares about Ethereum,” and not just because they’re eager for The Merge. It may signal that the Ethereum network is underprepared for coming events.
Furthermore, the unreliability of The Merge’s timeline could dampen enthusiasm, causing a lack of upward price pressure. The Ethereum Foundation has released a list of misconceptions about The Merge likely to disappoint some users who were initially very bullish on The Merge. For example, transactions will not be noticeably faster as predicted earlier. Discouraged users may cause low buy pressure, resulting in a neutral or decreased price of ETH.
If you are bearish on The Merge, and seek products that benefit from declining ETH prices, Index Coop’s Inverse Ethereum Flexible Leverage Index (iETH-FLI-P), available on Polygon, might be of interest. If the price of ETH decreases post-Merge, iETH-FLI-P will generate returns inversely correlated to the decrease in the price of ETH.
The Inverse Ethereum Flexible Leverage Index (iETH-FLI-P) leverages a collateralized debt position by targeting a short -1x exposure to ETH. The product is native to Polygon, enabling market participants to take on leverage while minimizing the transaction costs and risks associated with maintaining collateralized debt. This product seeks to deliver the opposite of the performance of the asset it tracks, ETH. iETH-FLI-P liquidity is currently on Balancer or iETH-FLI-P is available for purchase on the Index Coop app, using Flash Mint for lower fees.
Index Coop is a decentralized autonomous organization (DAO) that powers structured decentralized finance (DeFi) products and strategy tokens using smart contracts on the blockchain. We offer a suite of sector structured products, leverage and inverse products, and yield-generating products. We aim to create products that are simple to use, accessible to everyone and secure. Our products are built on Set Protocol, a twice-audited, self-custodial DeFi tool that allows for the creation and management of Ethereum-based (or ERC-20) tokens. Among users, partner protocols, and our composable products, Index Coop maintains one of the largest partnership networks in the DeFi ecosystem.
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