Merge & Diverge: Five Tokens That Could Outperform Ethereum

If Ethereum’s “Merge” occasion is profitable, ETH ought to profit. However there are lots of different lesser-known initiatives and tokens that would outpace the second-ranked cryptocurrency as soon as the Merge ships.  

Lido Finance and Liquid Staking Protocols

Lido Finance is without doubt one of the most well-publicized initiatives that would profit from the Merge. 

Lido lets customers stake their ETH with Ethereum Beacon Chain validators whereas nonetheless holding their funds liquid. It does this by issuing an equal quantity of stETH representing yield producing ETH Beacon Chain deposits. By Lido, stETH holders at present make round 4% APY. 

Nonetheless, after the Merge, the returns for staking ETH are set to extend considerably. The present yield consists solely of block rewards distributed by the Ethereum protocol. Nonetheless, as soon as the Ethereum community “merges” its Proof-of-Work chain with its Proof-of-Stake Beacon Chain, all transactions shall be processed by staking validators. This implies all precedence charges at present despatched to PoW miners will as a substitute be distributed to PoS validators, growing staking yields. 

Digital asset investor CoinShares’ base case is that ETH staking yields should at least double after the Merge whereas additionally making a extra optimistic prediction of returns as excessive as 10 to 12%. Elevated yields ought to lead to extra demand for ETH staking, finally benefiting Lido. 

As the one strategy to get publicity to Lido is thru its LDO governance token, many merchants have purchased it as a guess on the Merge being profitable. Moreover, there’s hypothesis {that a} portion of the charges generated by Lido might be distributed to token holders sooner or later, turning LDO into an asset with an actual yield. 

In fact, whereas Lido is essentially the most well-known liquid staking protocol, it’s not the one one. Rocket Pool and Stakewise, two smaller however well-established protocols, additionally stand to learn from the Merge for a similar causes as Lido. 

Manifold Finance

Subsequent up is Manifold Finance, a protocol creating key post-Merge infrastructure for the Ethereum community. 

Manifold is a middleware protocol that separates block constructing and block validation into two distinct actions. At present, Ethereum miners are answerable for compiling transactions into legitimate blocks and trying to mine them utilizing their hashpower. Nonetheless, after the Merge, separate entities will be capable to compile transactions into blocks and validate blocks, leaving house for a brand new “block builder” stakeholder within the Ethereum validation sub-economy. 

The protocol takes benefit of this by aggregating a number of endpoints comparable to Flashbots and Eden Community whereas sustaining direct entry to particular person mining swimming pools or validator nodes. Completely different entities can compete to construct every Ethereum block utilizing their very own maximal extractable worth methods; then, validators can select the one they want to validate based mostly on whichever is essentially the most worthwhile. Block builders assist validators discover essentially the most optimum blocks to validate, and each events revenue from the interplay. 

Manifold earns income from providing its providers, which will get distributed to those that stake the protocol’s FOLD token. If the Merge is profitable, Manifold’s staking income ought to enhance as extra block builders and validators make the most of the protocol’s tooling. 

Optimism and Layer 2 Networks

Third on the checklist is Optimism, an Ethereum Layer 2 community with a tradable token on the open market. 

As Layer 2 networks like Optimism depend on Ethereum mainnet for safety and validation, the Merge ought to increase them in a number of methods. For instance, the adoption of Proof-of-Stake ought to improve mainnet safety and thus Layer 2 safety. Furthermore, the transfer away from Proof-of-Work mining is predicted to slash Ethereum’s power consumption by over 99% and enhance Optimism’s inexperienced credentials. 

Nonetheless, a extra Layer 2 particular profit comes from a subsequent Ethereum improve that the Merge makes doable–EIP-4488. At present, Layer 2 networks like Optimism “roll up” transactions into “batches,” that are despatched again to Ethereum mainnet together with varied calldata for validation. The 4488 proposal seeks to cut back the price of posting this calldata on mainnet, decreasing the amortized value of transactions on Layer 2. Consequently, Layer 2 transactions turn out to be even cheaper.

If the Merge is profitable and EIP-4488 is carried out, fuel charges on Layer 2 might lower fivefold. This might doubtless make transacting on Layer 2 much more enticing, driving use and demand for Layer 2 native tokens like OP. 

It’s value remembering that EIP-4488 received’t simply scale back charges on Optimism—different Layer 2 networks comparable to Arbitrum, Metis, and the upcoming zkSync and StarkNet rollups will even profit. Nonetheless, as Optimism is at present essentially the most used Layer 2 with a token (Arbitrum hasn’t but launched one), it stands to learn essentially the most from a profitable Ethereum Merge. 

Ethereum NFTs

The subsequent entry on the checklist would possibly appear to be an outlier, however there’s a powerful thesis behind it. As an alternative of a selected token or protocol, we’re NFTs on Ethereum as an asset class that would outpace ETH within the occasion of a profitable Merge. 

ETH might admire post-Merge because of greater staking yields and a substantial drop in issuance. When the worth of ETH will increase, the worth of in-demand Ethereum NFTs tends to pattern in the identical course. On this manner, Ethereum NFTs could be seen as a leveraged guess on ETH. 

Psychological elements doubtless play an essential function on this market dynamic. When ETH surges, holders really feel richer than they beforehand did. And when folks really feel wealthy, they wish to spend their cash (on this case, ETH) on issues that exhibit their wealth—particularly NFTs. 

Others have additionally noticed how NFTs act as a form of Veblen good, an asset that defies the everyday legal guidelines of provide and demand and sees elevated demand as its value will increase. These two elements mixed present an evidence as to why Ethereum NFTs have beforehand outpaced spot ETH throughout market rallies. 

Not any and each Ethereum NFT assortment will profit from these results, although. In case you’re planning to guess on NFTs as a leveraged ETH play, it’s doubtless greatest to stay to initiatives with a confirmed observe report. For avatar NFTs, established collections like Bored Ape Yacht Membership or CryptoPunks are prone to be the most secure choices. Different NFTs that ought to do nicely embody top-tier generative artwork from names like Tyler Hobbs and Dmitri Cherniak.

Eden Community

The ultimate mission that would find yourself outpacing ETH following the Merge is a bit more speculative than the others, nevertheless it has sturdy fundamentals to again it up. Eden Network is a maximal extractable worth (MEV) safety protocol with shut ties to many outstanding gamers within the Ethereum validation system. 

At present, the protocol works with Ethereum miners to stop its customers from having their transactions front-run or sandwich attacked by these executing MEV methods. By staking the EDEN token, customers are granted greater precedence for his or her transactions and likewise acquire entry to Eden Community’s non-public relayers. 

Nonetheless, when Ethereum transitions to Proof-of-Stake, the core performance that put Eden Community on the map will disappear. Happily, the protocol has lengthy recognized this and has ready to pivot its providers for a post-Merge Ethereum. After the Merge, Eden will work with different protocols comparable to Manifold Finance to extend block manufacturing effectivity whereas guaranteeing its customers’ transactions are secure from MEV. Moreover, Eden is constructing a brand new product to assist maximize the yield customers can generate from liquid staking tokens. The protocol has developed its personal unique yield generation engine, which is at present deployed on Avalanche in partnership with Yield Yak and Geode Finance. 

If the Merge is profitable, Eden plans to deploy its yield technology structure on Ethereum, working with in style liquid staking platforms comparable to Lido and Rocket Pool to maximise returns for finish customers. Whereas these developments received’t have an effect on Eden’s tokenomics construction, they may doubtlessly enhance the protocol’s utilization. Like Lido, if a powerful narrative can kind round Eden Community, its token will doubtless act as a proxy guess for the protocol and may see a rise in worth. 

Disclosure: On the time of scripting this characteristic, the creator owned ETH, FOLD, and several other different cryptocurrencies.