Merge Chart Jamboree

By Riyad Carey, Conor Ryder, Clara Medalie, and Dessislava Aubert

All charts were updated 1 hour before publication at 1pm UTC, September 15th. All times referenced are in UTC.

Ethereum’s transition to proof-of-stake passed without a hitch, marking the successful conclusion to one of the most consequential events in the history of crypto and open source development. While prices have barely budged in the 8 hours following the Merge, preparations for this monumental shift were visible elsewhere in the markets, evidenced by a massive drop in funding rates, rising open interest, a widening staked ETH discount, and decline in liquidity in the hours preceding the event. In this Deep Dive, we’ll look at what’s changed, what hasn’t, and how markets could evolve over the next few days.

Derivatives Markets

Derivatives markets dominated ETH market activity in the month preceding the Merge, with the derivatives to spot volume ratio surging at the fastest rate ever observed. Both BTC and ETH open interest broke all-time highs (denominated in ETH) as traders speculated and hedged on all possible outcomes.

Post-Merge, open interest dropped slightly on Binance (from $2.15bn to $1.98bn) and FTX ($1.56bn to $1.52bn), though it appears to have stabilized at levels from earlier this week. Open interest on smaller exchanges remained mostly flat; Deribit moved from $276mn to $272mn.

In the 24 hours preceding the Merge, funding rates dropped to historic lows on all exchanges. FTX, which normally has funding rates near 0%, dropped to -0.0457%.

Funding rates have begun to recover on all exchanges. It’s useful to compare Binance and FTX funding rates; FTX was the first major exchange to airdrop ETHW to its users and saw its funding rate return to neutral. As of this writing, Binance still hasn’t and its funding rate is still negative. More on ETHW below.

Post-Merge options expiries have been bullish for months. In the immediate aftermath of the Merge, the September 30 expiry looks to be a pivotal one for ETH options investors, with nearly $8bn worth of options traded for that expiry, almost 75% of which are calls.

Notably, for the September 30 expiry, the $5,000 strike price has the most volume out of all expiries, the vast majority of which are calls. ETH would have to more than triple to reach this strike, and it appears these options will expire worthless.

Spot Markets

ETH spot market activity was relatively muted in both the run-up and aftermath of the Merge. CEX volumes remained stable without strong selling pressure or any prolonged increase in activity. In fact, hourly volumes did not surpass those during the Terra collapse or Celsius halting withdrawals.

Unsurprisingly, nearly half of this volume happened on Binance. The obvious outlier on the below chart is OKX, which increased its market share of ETH volume from a steady 4% to a whopping 23% at 3am on September 14; it has since returned to normal levels. FTX had steadily increased its market share from around 10% a week ago to the low teens pre-Merge to over 25% the hour of the Merge. Coinbase accounted for just 3% of volume the hour of the Merge.

DEX volume was also relatively subdued, though there were some large swaps in the days leading up to the Merge. It’s also important to note that Uniswap V3 was functional throughout the process, while traders had issues with centralized exchanges like FTX crashing in recent days.

In the 3 days leading to the Merge, sells of wETH for USDC outpaced buys $890mn to $800mn; this trend reversed on September 14 as buys surpassed sells $297mn to $280mn.

Liquidity

Liquidity began to deteriorate hours before the Merge: depth fell, slippage increased and spreads widened despite a lack of significant market movements or uptick in volume. This suggests market makers were being cautious in the run-up to the event.

Market depth across exchanges began to plummet in the hours leading up to the Merge and has continued to fall, though not concerningly low levels.

Looking at U.S. exchanges, spreads began to increase on September 13, with a sharp uptick in the late night/early morning hours of September 15.

This combination of decreased market depth and increased spreads led to a significant increase in slippage for sell orders, with Binance.US’s slippage nearly tripling and Kraken’s more than quadrupling (its 1% market depth dropped from over 1,200 ETH at 10am on September 13 to 187 ETH at the time of the Merge). Slippage on Coinbase nearly tripled, jumping from 0.05% to 0.135%.

Staked Ether

One of the most notable post-Merge trends has been the rapid reversal of the staked ETH discount. Immediately after it became clear the Merge had successfully completed, stETH, cbETH, and bETH shot up relative to ETH. While stakers will not be able to redeem their ETH from the main chain for at least 6 months, any immediate risk of large-scale failure has been priced out.

Staked ETH secondary market trading volumes also surged in the aftermath, and liquidity was re-added to DEX pools as liquidity providers grew more confident.

One of the biggest factors improving the stETH discount from 3.5% to 1.5% has been the additional ETH liquidity added to the Curve pool. Pre-Merge, ETH represented just 28% of the Curve pool, whereas after the Merge this has risen to 34%. The more balanced the pool becomes the closer stETH will get to the value of ETH.

The change in behavior of liquidity providers in the stETH Curve pool is clear to see post-Merge. There was a significant increase in the amount of both tokens added (mints), particularly for ETH post-Merge.

Proof-of-Work Alternatives: ETC and ETHW

Ethereum mining is now a thing of the past and miners are left deciding what to do. In the run-up to the Merge, there was a big shift in mining power towards Ethereum Classic (ETC), a hard-forked version of Ethereum from 2016 that has relatively little activity. Open interest has declined from all-time highs hit on September 5, the same day price jumped from $32 to $40. Funding rate also began to recover from lows, suggesting closing of shorts. ETC currently has a market cap to open interest ratio of 20, compared to ETH’s of over 45, which suggests ETC’s price may be heavily influenced by futures in the coming days and weeks.

A hard fork of Ethereum that will maintain the proof-of-work mining mechanism will occur24 hours after the Merge. The new Ethereum Proof of Work (ETHPoW) chain will airdrop its token ETHW to all holders of ETH once the chain goes live. This upcoming airdrop has been the source of a lot of the market activity observed over the past month, including decreased funding rates, as futures prices dipped relative to spot. This is because futures holders would not receive the airdrop.

FTX was the first major exchange to list spot ETHW (BitMEX, Bitfinex, and Poloniex had previously offered futures), though it notes that “ETHW represents the potential canonical ETH proof-of-work (PoW) token. If FTX determines no such token has emerged, the token will settle to zero.” Given this uncertainty and the questionable utility of the token, it’s not surprising that the market has been skewed towards sells.

Conclusion

The Merge has been likened to replacing the engine of an airplane while it’s still flying. Today, this process was completed successfully with no fireworks and nothing breaking. This is a testament to the Ethereum developers and community who not only organized such a technical achievement, but also communicated what to expect when it happened. Thus the lack of volatility looks like a vote of confidence in Ethereum; success was already priced in. There may be volatility in the days to come, but for now the community can take a well-earned victory lap knowing that the network tackled one of the biggest knocks against it: its energy usage.