The Surge before the Merge
The crypto markets were sent into a frenzy upon the CPI print, blowing the previous week’s rally out of the water. Interestingly, ETH continued to steal the spotlight, rising by 9% to ~$1,840 in just under an hour, while BTC rose by 4%, barely scratching $24k in the process. The ETH/BTC ratio has now breached 0.08, but only time will tell if it can continue its momentum to 0.1 ahead of the merge.
ETH/BTC ratio (August 1 - 15, 2022); Source: CoinGecko
While many were surprised by July’s results, several influencers on Twitter have taken their victory laps in predicting the recent market movement, citing the lack of alerts coming from the White House. Previously, officials have issued warnings of ‘elevated figures’ ahead of the CPI release, foreshadowing the grim results that were to come.
Things look pretty good to me— kamikaz ΞTH (@kamikaz_ETH) August 9, 2022
BTC and ETH stable around 23k / 1.7k even as S&P risked off to near 4100 ahead of CPI
CPI will undershoot (no White House warning), and S&P will jump and then grind up to 4300+ in coming weeks
Crypto will ride that wave and keep moving up ✌🏻
On the other hand, some remain unconvinced, especially with more stormy waters ahead. As Adam Cochran puts it, It may just be a temporary bounce that is beginning to lose steam, and we’ve still got a long road ahead of us before the next FOMC meeting in September. Whatever it may be, it remains to be seen whether the market has enough firepower to sustain the rally thus far.
Goerli or go home?
The Merge is coming after a ‘mostly’ successful Merge on the Goerli testnet on August 11. While the Merge was tentatively set to take place on September 19, it has been moved ahead of schedule to September 15 during a recent Ethereum developer call. This is when the new Terminal Total Difficulty (TTD) will reach 58750000000000000000000, kicking off the beginning of the Merge where the first Proof-of-Stake block will be produced.
The terminal total difficulty has been set to 58750000000000000000000.— vitalik.eth (@VitalikButerin) August 12, 2022
This means the ethereum PoW network now has a (roughly) fixed number of hashes left to mine.https://t.co/3um744WkxZ predicts the merge will happen around Sep 15, though the exact date depends on hashrate. pic.twitter.com/9YnloTWSi1
We say ‘mostly’ successful because there were some initial concerns regarding re-orgs during the Goerli testnet merge; there were two different terminal blocks, exacerbated further by the lack of updated nodes. However, the genesis block for the PoS chain was eventually finalized.
Another Friday, another Eth dev call summary. 👇— Christine Kim (@christine_dkim) August 12, 2022
As you've probably heard, devs picked tentative dates for the Merge on this call. They also gave a detailed post-mortem of the Goerli testnet and updates on the circuit breaker discussion around MEV-Boost.
A follow-up investigation by the core developers determined that there was an issue that led to conflicting blocks. In short, there was an issue with selecting which terminal block to process because competing blocks synced at different rates. The issue was ultimately resolved after a short period. However, there will be plans to implement a new fix that will prevent this bug from occurring during the actual Merge. Bottom line, there should be no further delays for the Merge.
Despite these issues, the success of the final testnet merge had an overwhelmingly positive effect on the price of Ether, albeit slightly delayed. While ETH rose by a small margin to $1,930 just after the successful Goerli merge was announced, it would take more than a day later for Ethereum to continue climbing further and break past the $2,000 mark.
As it stands, Ethereum has since retraced to $1,910, but there’s still a month left until the Merge is slated to occur, and anything can still happen. As we inch ever closer to September, we should see even more volatility in the markets as advanced participants will seek to take advantage of various ETH derivatives and other avenues in DeFi to get the most out of their ETH stack.
Ethereum price chart (August 9 - 15,2022); Source: CoinGecko
PoW = Proof-of-Weakness?
Speaking about ETH derivatives, we’ve seen multiple exchanges, namely Poloniex, MEXC, Gate, and Digifinex, gearing up for the possibility of a PoW ETH fork by listing their own versions of ETHW as well as the post-Merge version known as ETHS. Even though they all have the same name, these assets are essentially tied to their respective exchanges and represent IOUs for Ether once the merge is completed and the PoW fork becomes a reality. Since last week, there were noticeably fewer rumblings in the space about the whole affair, but there have been some interesting developments regarding ETHW itself.
Originally, ETHW could only exist on an exchange without being represented as a fungible token, but now, Poloniex has now issued its own version of ETHW and ETHS on the Tron network. Although this means that users can now withdraw their tokens from the exchange, it doesn’t seem to be that impactful, especially since each exchange has its own version, and it would be difficult to expect them to conform to the token standards set by Poloniex. Additionally, Bitmex has launched a futures market for ETHW, which expires at the end of December 2022, a long way after the Merge is scheduled to be completed.
While more exchanges are listing ETHW and ETHS pairs in the hopes of capitalizing on the ETH PoW movement, it’s not hard to see that they’re all fighting for a slice of the same pie, albeit a small one. Based on trading volume, Poloniex and Digifinex are currently the go-to exchanges for buying and selling ETHW, with the former recording over $6M in daily volume, more than triple the volume of the latter. Meanwhile, traders prefer their ETHS on Poloniex and MEXC instead, which is not surprising given that both these exchanges offer the most liquidity for that particular asset.
With that being said, for such strong levels of trading activity, the orderbooks for ETHW are still fairly thin across the board. For example, Poloniex currently holds around $400k worth of liquidity across all its trading pairs, just over 6% of its daily volume. If liquidity continues to remain stagnant, we should expect more violent bouts of volatility should the chatter for PoW ETH continue to pick up (or die down).
At the moment, ETHW and ETHS are trading at a ratio of 4-96 across all exchanges, with the exception of Digifinex, where it is trading at just a 2-98 ratio. This is a drastic reduction from last week when participants were pricing in PoW ETH’s ability to take at least 7% market share away from PoS ETH. It would seem peculiar that this would be the case, considering that the initial codebase for PoW ETH has already been published. Yet, as we move closer to the Merge, only time will tell if PoW ETH will carry any sort of value or simply vanish from existence. However, with the recent news of a separate unofficial PoW ETH fork getting rugged, the latter option is becoming more of a reality.
Other Things to Watch Out For
While the data seems to indicate a more positive macro environment, geopolitical turmoil continues to be a factor that could change the market’s tides in an instant. The US has recently agreed to send an additional $5.5B to aid the Ukrainian war effort. Although China has claimed to have completed its military drills around Taiwan, tensions may resurge as more American representatives arrive on the island nation. The conflict between Ukraine and Russia is far from resolved, but should the same situation arise in the East, things could get even uglier.
Overall, there are several more key figures to look forward to in the week ahead, but we will be keeping an eye on July’s retail sales figures on August 17th for a clearer picture of consumer spending, which could indicate the need for a more aggressive rate hike. However, the markets may be more interested in the FOMC meeting minutes, together with a number of speeches by the Fed’s top brass, to get some idea of what they might have in store for September. Also, the Norges Bank of Norway, as well as the Royal Bank of New Zealand (RBNZ), are expected to increase interest rates this week.
Following up on the sanctions issued by OFAC, dYdX is now blocking accounts that have associated with Tornado Cash. Moreover, users are also reporting a similar situation with other DeFi protocols such as Aave, Balancer, and Uniswap. As the fight for decentralization takes a turn for the worse, the narrative surrounding decentralized stablecoins continue to grow stronger. Platforms such as Liquity and Vesta Finance have become more popular overnight and may continue to attract more users should DeFi continue to be threatened.
Win Win is an avid gamer, interested in navigating the vast world of NFTs and the cryptoverse. Follow the author on Twitter @0x5uff3r