Ethereum’s Successful Merge: What Does this Mean for Hedge Funds?
Clay Garnett, Growth Marketing Manager and Conor Keville, Sr. Content Marketing Strategy Manager at Blockdaemon, share insight on the recent Ethereum merge and what this means for Hedge Funds.
On September 15, 2022 Ethereum achieved its most significant milestone to date. The long anticipated Merge event was a success, with the first Proof-of-Stake block being validated 06:42 UTC. This event created the single largest mass-adoption of Proof-of-Stake technology in the crypto industry to date. As expected, attestations dropped at first from the usual 98-99% pre-merge level. This was caused by some validators on the network not updating their nodes in time or having technical issues. This was no cause for concern and is not a threat to the network, which kept building blocks and finalizing epochs.
But, what does the success of The Merge mean for you?
Ethereum’s move to Proof-of-Stake (PoS) marked an important evolution in blockchain networks. This switch away from mining is already democratizing networks and reducing the environmental impact of protocols. Importantly too, PoS is giving institutional token holders a chance to earn valuable staking rewards.
What is The Merge?
The Merge combined Proof-of-Work (PoW) Ethereum Mainnet with the Beacon Chain Proof-of-Stake (PoS) system. The Merge had large implications for the Ethereum ecosystem, such as:
The end of PoW mining for Ethereum
Reduced energy consumption (~99.95%)
Increased network security and decentralization
Sets the stage for future scaling upgrades (e.g., sharding)
Reduced Issuance Rate
Some important changes that are specifically interesting for hedge funds are ESG-compliance and the increase in real staking rewards as a result of reduced issuance rate.
The Merge Favors Institutional Stakers
The Merge has positive implications for Etheruem stakers, including:
90% reduction in ETH issued (aka. "triple-halving")
At an average gas price of at least 16 gwei at least, 1,600 ETH burned every day, effectively bringing net ETH inflation to zero or less post-Merge
Stakers cannot sell staking rewards right now (only after withdrawals are enabled in the future)
The addition of Maximum Extractable Value, or “MEV”: The process by which block builders review the available transactions to be included in the next block and select the ones to include and in which order
ESG Crypto Asset for Hedge Funds
Previously Proof of Work miners required energy intensive computers to solve algorithms to verify blocks and provide security to the chain. Post-Merge, the transition to Proof-of-Stake staking allows investors to deposit 32 ETH as collateral on a smart contract with minimal associated energy consumption.
Reduced Issuance Rate - Higher Real Staking Rewards
In this Post-Merge era, the reduction of issuance is expected to go from 4.3% to 0.43% and that more ETH could be burned in transaction fees than the amount of ETH issued. Here are some calculations from Messari on expected rewards post-Merge:
How MEV Maximizes Institutional Ethereum Staking Rewards
Of all these implications, Maximum Extractable Value (MEV) is set to be one of the most important for stakers. With MEV, block builders include, exclude, and change the order of transactions. These blocks are built and relayed to the validators. This process seeks to maximize the value that can be extracted per block produced. MEV is an important additional revenue stream for stakers post-Merge. If the block your validator is publishing contains any MEV transaction bundles, the tips (extra rewards) will be sent to your Ethereum withdrawal address.
As shown by the below diagram, MEV significantly increases annual staking rewards.
One such democratized MEV solution is Flashbots’ MEV-Boost.
Blockdaemon clients benefit from MEV staking rewards post-Merge.
You Can Get In Ahead of the Validator Queue
When you first stake ETH, your validator joins an activation queue. Sometimes, it can take a while for your validator to be activated. Only six validators can enter the network per epoch (which is about 6.4 min). So roughly 1350 Ethereum validators can be added to the network per day. Any validators outside this threshold are added to the queue. At the time of writing the queue is very short. Historically, at times there have been wait times of between 1-4 weeks. The Ethereum validator queue stats can be viewed in real-time here.
When Are Withdrawals Enabled?
Staking withdrawals are not yet enabled with The Merge. The following Shanghai upgrade will enable staking withdrawals (~Q1/Q2-2023). This results in an estimated ~6 months of no sell pressure from stakers. Furthermore, Proof-of-Stake results in the end of sell pressure from miners who needed to sell rewards to recover external electricity costs. This is estimated to deliver 100,000 ETH less sell pressure per week.
Blockdaemon Can Help You Maximize Your ETH Staking Rewards
Staking ETH with Blockdaemon lets you earn all the rewards, without any node-management hassles.
When you stake with us, you are joining a huge pool of existing Ethereum validators. We also provide business & technical risk mitigation:
Seamless ETH staking with industry-leading custodians
Non-custodial ETH staking directly with Blockdaemon
Best-in-class infrastructure for stable and rapid performance
Sophisticated in-depth monitoring for minimal downtime
100% slashing insurance for Blockdaemon-incurred penalties
Free-of-charge, white-glove services for onboarding new clients
Stake Your ETH With Blockdaemon Today
Get in touch with Blockdaemon today to learn about our ETH staking program and incentives!
Disclaimer: This information, as well as the information and resources available on this website, is intended to be used for educational purposes only. It is not financial advice or a solicitation to buy or sell any assets or to make any financial decisions. Before making any investment decisions, it is important for you to do your own analysis as well as take independent financial advice from a professional taking into consideration your own specific needs and circumstances.