Investors in ether and its troubled twin stETH are nervously anticipating a crypto milestone: the merger.
It’s the name of a major upgrade to the Ethereum blockchain network that many crypto projects are built on, aimed at making it leaner, meaner, and cleaner.
It is elusive. The merger was supposed to happen years ago but has been repeatedly delayed as developers recently dropped plans to hit the button in June, confusing investors who were beginning to fear it might not happen. never see the day.
Now, however, market participants are betting that the end of the wait is near. But it’s not a slam dunk.
On Polymarket, a crypto site where users place bets with stablecoins on the occurrence of future events, investors have rated a 67% chance that the upgrade, also known as Ethereum 2.0, will materializes by October, and at 13% probability by September.
The Ethereum Foundation, which uses the analogy of changing a spaceship’s engine mid-flight, states on its website that the merger “is happening” around “Q3/Q4 2022.”
The merger finally occurring would be a big relief for Ether, which has crashed due to past delays and loss of confidence in upgrading. The second-largest cryptocurrency was last trading at around $1,200, down from just over $3,500 in April, although much of the recent pessimism about the upgrade has been drowned out by recent broader market turbulence.
The merger could also represent the end of a hardship for investors holding a crypto derivative token called staked ether or stETH, which represents ether locked in a test environment for upgrading, and which is difficult to trade at large. scale before at least six months. after the merger.
Still, skeptics remain.
“It’s just the bulk of the protocol. Ethereum is so huge that I don’t think they’ll reach maturity in time,” said Brent Xu, founder and CEO of Umee, which is building a base layer. blockchain to borrow and lend.
“People are just afraid that their stETH will be worthless because the merger will probably take longer than expected,” Xu said.
The Stumble of stETH
The upgrade will see ether mining move away from energy-intensive proof-of-work. Ethereum’s existing execution layer will merge with the new Proof-of-Stake consensus system.
Any further delay would be bad news for those holding stETH, a token created by a crypto project called Lido that can be converted to ether on a 1:1 basis between six and 12 months after the merger.
Until then, stETH is trading at a market set price, with most trading taking place on a trading platform called Curve.
It hit a market cap of $11 billion in May, according to price site CoinGecko, and until last month was trading broadly at par with ether.
However, when crypto markets sold off last month, the value of stETH fell to trade at around an 8% discount to ether, hurt by heavy selling by investors such as Celsius. and Three Arrows according to public data.
The price rallied a bit – stETH is currently trading at a 4% discount to ether – but did not return to parity, in part due to the impact of the delayed merger.
Major investors in stETH include Celsius, the US-based crypto lender.
Takers for this job?
The stETH project was popular because while investors can earn interest elsewhere by “staking” their ether, to do so they must lock up a minimum of 32 ether (currently around $38,000) until the network goes public. new standard.
Lido, instead, allowed them to stake as little ether as they wanted in return, and receive stETH.
Yet repeated merger delays are testing the nerves of stETH investors.
The concern is that liquidity is drying up quickly at Curve, said Ryan Shea, crypto economist at global fintech firm Trakx.io. Curve’s stETH liquidity has more than halved since mid-May, according to data from the platform.
“You’re going to have to find alternative sources if you want to sell a huge amount of stETH,” Shea said, for example by pledging stETH as collateral in another loan protocol.
“But in this type of environment where people are watching crypto lending companies closely, I don’t know if anyone will be willing to accept this trade.”