Merge & Diverge: Five Tokens That Could Outperform Ethereum

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

Lido Finance and Liquid Staking Protocols

Lido Finance is among the most well-publicized tasks that might profit from the Merge. 

Lido lets customers stake their ETH with Ethereum Beacon Chain validators whereas nonetheless preserving their funds liquid. It does this by issuing an equal quantity of stETH representing yield producing ETH Beacon Chain deposits. By means of Lido, stETH holders presently 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 can be processed by staking validators. This implies all precedence charges presently despatched to PoW miners will as a substitute be distributed to PoS validators, rising 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, in the end benefiting Lido. 

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

After all, 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 profit 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 the moment, Ethereum miners are chargeable for compiling transactions into legitimate blocks and trying to mine them utilizing their hashpower. Nonetheless, after the Merge, separate entities will have the ability 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 equivalent to Flashbots and Eden Community whereas sustaining direct entry to particular person mining swimming pools or validator nodes. Totally 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 companies, 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 enhance 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 vitality 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 the moment, 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 scale back the price of posting this calldata on mainnet, decreasing the amortized price of transactions on Layer 2. Consequently, Layer 2 transactions turn into even cheaper.

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

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

Ethereum NFTs

The following entry on the checklist may seem 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 might outpace ETH within the occasion of a profitable Merge. 

ETH may respect post-Merge due to increased 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 path. On this method, Ethereum NFTs will be considered as a leveraged wager on ETH. 

Psychological components seemingly play an necessary position on this market dynamic. When ETH surges, holders really feel richer than they beforehand did. And when folks really feel wealthy, they prefer 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 sort of Veblen good, an asset that defies the everyday legal guidelines of provide and demand and sees elevated demand as its worth will increase. These two components mixed present a proof 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 the event you’re planning to wager on NFTs as a leveraged ETH play, it’s seemingly greatest to stay to tasks 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 effectively embrace top-tier generative artwork from names like Tyler Hobbs and Dmitri Cherniak.

Eden Community

The ultimate undertaking that might find yourself outpacing ETH following the Merge is a bit more speculative than the others, but it surely 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 the moment, 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 increased precedence for his or her transactions and in addition 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. Luckily, the protocol has lengthy recognized this and has ready to pivot its companies for a post-Merge Ethereum. After the Merge, Eden will work with different protocols equivalent to Manifold Finance to extend block manufacturing effectivity whereas guaranteeing its customers’ transactions are protected 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 presently 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 standard liquid staking platforms equivalent to Lido and Rocket Pool to maximise returns for finish customers. Whereas these developments gained’t have an effect on Eden’s tokenomics construction, they might doubtlessly enhance the protocol’s utilization. Like Lido, if a powerful narrative can kind round Eden Community, its token will seemingly act as a proxy wager for the protocol and may see a rise in worth. 

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