Life After Merge

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Now that the Merge is done and dusted, what will happen to Ethereum in the face of a worsening economic climate?

On the 15th of September, at 2.45 AM EST last Friday, Ethereum successfully transitioned into a Proof-of-Stake network. This transition to PoS, an idea that had been in the making since the very inception of the Ethereum network itself, had come to fruition. Despite the choppy price action leading up to the Merge, the actual event went off without a hitch, with the network successfully reaching finality after 12 minutes. Yet, as Ethereans the world over began to rejoice over the most significant crypto event of 2022, Ethereum’s rollercoaster ride has just begun.

Selling the News

As the Merge day was finally set, traders had already begun making their moves. Even days before the event was slated to occur, ETH inflows into centralized exchanges were starting to pick up, culminating in over 980k ETH (~$1.6B) being moved onto exchanges on the eve of the Merge, the highest net inflow since 2016.

Source: Glassnode

Even after Ethereum sustained an 8% price drop to $1,600 thanks to the latest inflation figures from the US, it was apparent that many were still willing to sell their ETH at this level as the exuberant narrative surrounding the Merge was beginning to wane. Constantly touted as the most bullish event for Ethereum for the next few years, traders were getting ready to ‘sell the news’ once the Merge was officially completed.

However, much like the lack of disturbance that occurred during the Merge, the first few hours of the post-Merge markets were relatively quiet. While ETH entered a temporary period of deflation during the first 12 hours, with over 250 ETH burnt, the impact was hardly noticeable. 

Neither bears nor bulls managed to gain any significant control as ETH remained within the $1,600 range well into the night before the US equity markets opened once more. And with that, the floodgates opened.

With stronger-than-expected retail figures, paired with a tightening labor market, investors were understandably nervous as there was now a real possibility that the Fed would go the extra mile in their fight against inflation. As Treasury and bond yields continued to climb even higher, equities and crypto assets tumbled in the ensuing sell-off. Failing to defend the $1,600 support level, Ethereum sank by 6.3%, falling to $1,489, and continued to grind lower, hovering just above $1,420 after a devastating week for global risk-on assets.

Source: CoinGecko

Though most crypto assets managed to stem the bleeding over the weekend, the carnage resumed almost instantly on Monday. The pre-emptive sell-off continued for BTC and ETH, as many were expecting the worst from the Fed and probably more. Even as US equities mounted a comeback to wrap up the day in the green, Ether prices nosedived by 9%, plunging to as low as $1,280. As the Fed’s decision drew closer, ETH remained in the $1,300 range - but not for long. 

Of Russia & Rate Hikes

Putin mobilizes

Coincidentally enough, right before the FOMC meeting, another significant market-moving event took place. Vladimir Putin on Wednesday ordered Russia's first mobilization since World War II, warning the West that if it continued what he called its "nuclear blackmail", then Moscow would respond with the might of all its vast arsenal.

It significantly escalates the conflict over Ukraine as Russia battles a Ukrainian counter-offensive that has forced its troops to retreat and surrender some occupied territory.

Pundits believe this is a further gamble by Putin to ‘save face’ and justify their failures after the Ukrainian war. There was a slight dump by the markets after the speech took place but nothing major happened until the FOMC meeting.

September FOMC Meeting

Unsurprisingly, the Fed has not detracted from its data-driven stance. As it stands, inflation has dropped but is stickier than expected, resulting in another increase of 75 bps. 

Even though the decision was in line with expectations, the news sent ripples throughout the markets, as usual, in spectacular fashion. Bitcoin rallied to $19,700 within an hour of the announcement before it plummeted back to $18,500. On the other hand, ETH took an even harder hit, falling over 10.6% and bottoming out at $1,230.

Source: CoinGecko

As experts begin to digest the ramifications of the Fed’s decision, here are some of the key takeaways from the meeting, as well as Powell’s recent speech:

1. Based on the newly released Dot Plot Chart, 12/19 FOMC participants expect Fed Fund rates to reach between 4.5%-5% by December 2023.. While not reliable, it does suggest that the Fed is willing to tighten the economy until inflation hits a more manageable figure.

2. According to Powell, the Fed will not waver until inflation is at 2%. Given that the CPI has shown an increase in August despite the previous rate hikes, it remains to be seen whether the Fed’s latest monetary exercise will achieve its intended effect in the coming months.

3. GDP growth is expected to slow down to 0.2% in 2022, rising slightly in the following years to a longer-term rate of just 1.8%. If economic figures in the near future reflect a similar situation, the Fed may be forced to walk down on their efforts or risk creating a stagflationary environment.

4. The Fed has been reducing the number of bond holdings it has accumulated over the year, otherwise known as quantitative tightening. Up to $95 billion a month in proceeds from maturing bonds being allowed to roll off the Fed’s $8.9 trillion balance sheet.

5. Pundits believe the Fed will not pivot until other key economic levers are broken. If such levers are even tested, things will not bode well for capital markets the world over.

Forks Aplenty

During this time, several ETH PoW forks finally made their debuts. Although most exchanges have decided to support the official ETHW fork championed by Chandler Guo and other heavyweight miners, Poloniex notably switched their allegiance to EthererumFair (ETF) as the main ETH PoW network. Regardless, it’s been quite the dump fest for them all, to say the least.

Major centralized exchanges such as FTX and OKX were the first to support trading for these assets, and users were quick to sell their airdropped tokens immediately. Without any foreseeable incentive in acquiring or holding these forked tokens, ETHW had essentially become a race to the bottom for airdrop recipients. In the coming days, ETHW fell by over 80% to just $10 - less than 1% of ETH’s value at the time.

 Source: CoinGecko

Over on the forked networks, little progress has been made to develop and maintain an actual ecosystem of apps for users. While some DEXs have been launched, such as PoWSwap, they have merely become a tool for users to convert their forked assets into ETHW, which will no doubt be sold via CEXes as the ETH PoW narrative fades into obscurity.

Some Thoughts

Many have expected the Merge to have a more positive impact on the price of Ether. Thanks to the Merge, the daily inflation of ETH has dropped to a much healthier pace compared to what it was before transitioning to PoS. If PoW were maintained,  over 85,000 ETH would have been created since the Merge. As of the time of writing, only 4,300 ETH has been newly issued since then, a whopping 95% decrease. 

Source: Ultrasound.money

Yet, the recent price action has demonstrated otherwise, even though ETH will become much scarcer in the future. Although we can talk about the fundamentals all we want, this does not change the fact that crypto is currently tightly tied to the macro outlook. As it stands, inflation is still sky-high while Russia threatens to start WW3. We cannot emphasize enough that bear markets are brutal, and you can expect slow and long bleeds over months.

But price isn’t everything. Even in the bear, one should not forget that the Ethereum community has successfully executed one of the largest coordinated undertakings in history. There’s still plenty of work and many more upgrades in the coming years.

Simplified as the surge, verge, purge, and splurge, these will all be key moments in Ethereum’s continuous evolution. As Vitalik himself puts in, Ethereum is only two-fifths of the way there, and as fellow Ethereans, we’re all excited to see what’s in store for the next chapter of the network.

This article was produced in collaboration with Khor Win Win. You can follow him on Twitter here.