Crypto derivatives traders expect Ethereum staking yields to double to 8% after the Merge

    17 Aug 2022

    In anticipation of the Merge, Ether’s price has surged, and the higher yields foreseen by derivatives traders would further enrich the Ethereum ecosystem.

    Ethereum’s Merge seems poised to make staking the blockchain’s ETH tokens more rewarding than ever, derivatives traders believe. Yields are seen jumping to 8% from around 4% now, according to interest-rate swap pricing on the Voltz Protocol. As the Merge is likely to happen in September, Ether prices have surged in recent weeks in anticipation of higher yields across the Ethereum ecosystem.

    Investors can bet on future yields for Lido’s staked Ether (stETH) token and Rocket’s rETH through Voltz. For now, most traders on those two pools were what’s known as variable takers (VTs), meaning they’re swapping a fixed interest rate for a variable rate, believing staking yields will double to 8%. Around 82% of the just over $12 million in those pools, which went live July 1 and will expire at the end of December, are VT investments.

    “With so many traders choosing to be VTs, this suggests the vast majority are expecting variable rates staking yields to increase substantially from where they are today,” Voltz CEO and co-founder Simon Jones told CoinDesk.

    Expectedly, the emergence of the decentralized finance (DeFi) interest rate swap market may help accelerate market maturity by allowing borrowers and lenders to hedge risks and facilitate price discovery of interest rates. It’s yet one more way cryptocurrencies are looking more like traditional financial markets.

    Variable takers can earn a 150% annual percentage yield by taking a levered bet through stETH pools, Jones told CoinDesk earlier.

    “If the stETH rate is higher through the pool’s term than the fixed rate at the point of entering the pool, the trader will be in the money and will have successfully traded The Merge in one of the most capital efficient ways possible,” he explained.

    Ethereum’s Merge will combine the current proof-of-work blockchain with the proof-of-stake beacon chain that has been running since the end of 2020.

    Following the upgrade, Ether’s total new issuance will likely drop by 90%, bringing a store of value appeal to the cryptocurrency. Beacon Chain stakers currently earn block rewards. Post-Merge, stakers will get a share of transaction fees and revenue from what’s known as miner extractable value (MEV) or ordering blockchain transactions in the way that generates the most money.

    The upcoming upgrade makes most market participants take bullish exposure on Ether in the spot and derivatives markets and buy stETH tokens.

    Nevertheless, rates play may be a relatively safer option in the current macroeconomic environment, as Ether’s price and the prices of its staked derivative tokens are vulnerable to the US Federal Reserve’s ongoing campaign of increasing interest rates.

    To put it simply, the Merge-driven upside in Ether and related tokens could remain elusive due to Fed tightening. However, staking yields could continue to stay resilient and rise as expected after the Merge. The yield on staked Ether has remained steady at around 4% throughout the recent bear market.

    Meanwhile, leverage also brings with it the chance of forced liquidations due to margin shortages, with another source of risk of a potential drop in yields.

    “While leverage increases your potential upside, it also exposes you more on the downside, meaning you could get back less than you put in,” Jones noted.

    As reported earlier, the Ethereum token’s price rises as it is moving closer to long-awaited the Merge upgrade. Meanwhile, part of the community led by the prominent miner intends to resist the upcoming shift to ETH 2.0 and create a new, parallel network and cryptocurrency ETHW to preserve the existing Proof-of-Work method and ETH mining.

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