Four arguments against the Ethereum merger being overhyped

Last week, Jordi Alexander published an article in Bankless titled “Are Mergers Overhyped?”

Ever since Jordi joined Bankless and helped us detonate the Terra time bomb (about a month before it collapsed), I’ve admired his rational and clear-headed thoughts on the market. Reading his pessimistic take on the merger was great practice, something I had a hard time seeing myself.

However, I think there are some major things that Jordi either gets wrong or over-emphasizes! I wrote some rebuttals to the statements in Jordi's article that need the most explanation.

Image courtesy of Midjourney

Tl;dr:

• Bearish because of low gas fees? Don’t be; the reduction in issuance is what matters.

• Bearish due to excess locked ETH? Maybe… but I think it’s overstated.

• Bearish because yields are going to be low? Don’t be; this is actually the bull case we are looking for.

Let’s find out.

Is the merger overhyped?

Argument 1: It’s just a narrative game

Jordi’s first argument is that “this is yet another narrative trade opportunity in the endless stream of narrative trade opportunities in crypto.” The core of this argument is that “no matter how strong the fundamentals of the catalyst are, the market can always take advantage faster than the catalyst.”

I think that's a cop-out. It's just saying that any event is lost to time, and once it's over, we move on to the next narrative.

This leaves no room for a fundamentally bullish merger. The door is already shut on it before we even discuss the pros and cons.

The rebuttal to this is, in my opinion, easy.

The Ethereum merger is one of the most important events in crypto history since the creation of Ethereum itself. Not only that, it is also an event that is fundamentally about price and value.

If there was anything significant enough to break through the “traders want to trade” imitation, it would be an Ethereum merger.

If you don't believe this, check out Eric Wall's Twitter poll:

More than half believe the Ethereum merger will happen as advertised. Another 32.7% of respondents said it will either be problematic or not happen.

That is, 62% believe the merger will happen, while 38% believe it will not happen or will go wrong.

Now, if you’re like me, Ryan, Anthony Sassano, or any of the Ethereum client teams and core developers, you’d think there’s a greater than 95% chance that the merge will happen on September 15th, and that it will be a complete success.

If the market is pricing in less than a 95% success rate, then I would consider the merger not to be priced in.

I guess you can place your bets, but it's worth noting that those who have studied the details of the merger are more bullish on its success than those who responded in this poll.

Eric Wall's Twitter followers also come from many different communities, so while Twitter polls are not a great data tool, I think this is a special case that accurately reflects the broad distribution of communities.

Argument 2: Gas fees have dropped significantly

Jordi’s next argument was that gas fees have dropped dramatically.

He is right, it is true.

“In the last 30 days of August, the ETH price increased by more than 50%, and gas consumption was only about 1,300 ETH per day.”

By this point, the burn rate of EIP 1559 becomes negligible, which adversely affects the argument of ETH being a super sound currency. ??

He also believes that gas fees will never return to the levels of DeFi Summer or NFT Mania. Both smart contracts and NFT sales mechanisms have become more efficient and gas fees have been optimized, and the L2 ecosystem is more developed and ready to absorb a large amount of L1 block space demand.

He is right!

I can definitely support Jordi's argument that the days of 200+ gwei gas prices are over.

But I also think the current 8-12 gwei average gas price paradigm is also on the low side. We are in a bear market starting in 2021. Not much new is happening.

As long as the price action of cryptocurrencies picks up, gas prices will pick up again. There is always something new to do and there is always another bull run to come.

Jordi argues that 200+ gwei gas prices are abnormal. My argument is that 8-12 gwei gas prices are also an anomaly.

We only need 15 gwei to achieve net negative ETH discovery. But more importantly, this whole thing is overblown.

The merger is about the issuance reduction of block rewards! It is not about the burning!

A gas price of 10 Gwei destroys about 1,000 ETH per day.

Proof of Stake (PoS) eliminates the issuance of approximately 1,350 ETH per day.

Who wouldn’t be happy with low gas prices? Reducing issuance has always been the most important thing, and burning is just the icing on the cake. This effect is why some ETH bulls expect the impact of the merger on ETH price to be relatively quick: months rather than years.

When ETH issuance is reduced to 0.43% and other L1s look like this (below), can we really say this is not bullish?

Argument 3: Locked-up ETH will be sold

Jordi's next argument is that the supply of staked ETH and its rewards will affect the market. In turn, once the unlocking occurs, there may be huge selling pressure, which will panic investors.

Maybe there is truth to this statement, but the actual facts behind this statement do not seem very pessimistic to me.

First and foremost, PoS is a system that inherently rewards those who are most bullish on the asset.

Some people started staking their ETH on the beacon chain at the beginning of the bull run in 2021. At that time, ETH was only around 400-700 US dollars.

Let me ask you, these people are:

• Eager to lock in their profits?

• A perpetual long who is willing to spend an unknown lock-up period by staking ETH in advance and potentially never sell?

If you staked ETH when it was still under $1,000, you did it within the first 6 weeks of the beacon chain launch. You were willing to take on an unknown lockup time to get a ~6-7% yield on ETH.

Psychologically speaking, I don't think this group of people are the ones who are in a rush to sell ETH.

If a low conviction ETH staker wants a liquidity exit, they stake on Lido (launched the same month as the Beacon Chain) so they can sell their ETH at any time.

Even at current prices, ETH is up 2-4x for the earliest stakers. This is not the 10-100x gains seen in private token markets, which actually do cause token prices to fall.

Finally, the pressure of opening the “sell gate” can also be alleviated by those who wait for the merger to reduce Ethereum risk and buy Ethereum at an equivalent price after the merger.

Argument 4: Yields will fall

Jordi believes that ETH's staking yield is falling sharply.

“In the year after these risks disappear, Mall Cops who staked ETH would be lucky to get an annual return of 1-2% after the token inflation, which is even lower than US Treasury bonds.”

“By 2023, we’re going to see 30 to 60 million ETH staked.”

Wait, is this bearish?

Because this is actually the same as my bull case.

If ETH yields have fallen so low, it’s because a large amount of ETH has already been staked and issuance is spread across many participants. This is what ETH bulls want to see.

Low ETH yields mean that a large amount of ETH is staked. As more and more ETH is staked, the circulation will become lower and lower.

This also means that DeFi’s ETH yield is equally high, because DeFi also absorbs a large amount of ETH from the secondary market.

I think it's hard to see 30-60 million ETH staked and still be bearish because a large amount of staked ETH has been one of the core pillars of ETH's appreciation regardless of ETH's relative yield.

If people are willing to accept lower and lower yields on their ETH, to the point where the yield drops below 3%, it’s because the asset is highly desirable and owners are willing to get paid less for owning it.

Furthermore, if we are concerned about oversupply from a merger, why would we also see staked ETH supply increase from 14M today to 30-60M by 2023?

That doesn't seem very pessimistic to me.

But what do I know, I’m just an ETH permabull.