Mega Issue: The Merge
About the editor: Spencer Noon is Co-founder & General Partner at Variant Fund.
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Coverage on The Merge.
① The Merge: A Success!
👥 Nate Maddrey & Kyle Waters (Coin Metrics)
📈 Ethereum seamlessly transitions to Proof of Stake
After years of anticipation, Ethereum underwent a successful merge at block 15537394. The chain continued running, seamlessly transitioning from PoW to PoS. On the PoW chain, the average block interval was about 13 seconds, but there was an inherent degree of randomness. Following the transition to PoS block intervals are much more predictable, typically every 12 seconds. However, if a validator is offline, the slot is skipped, leading to some 24 second (or more) intervals.
There was a short stretch of relatively high total fees immediately after the merge but it quickly died down. Notably, the first block following the merge had a total of 46.5 ETH, but it was almost entirely due to a single NFT project’s mint (note: outliers filtered from the chart).
At current staking levels, about 1.67k ETH is now being issued a day, an 88% reduction in issuance compared to pre-merge. Factoring in ETH burned due to EIP-1559, Ethereum would have theoretically been deflationary for most of the past year and will likely often be deflationary moving forward.
② Post-Merge Validators
👥 Rob (Rated Network)
📈 170% increase in validator rewards post-merge
Rated aims to bring transparency to the infrastructure underlying the blockchain ecosystem—starting with Ethereum validators. Data as of Epoch 146951, Slot 4702463, as the Merge rolled in, validators became the recipients of Execution Layer transaction fees and MEV (maximal extractable value). Post-merge, we saw an increase of 172% in rewards per validator compared to the last epoch pre-merge.
Since the merge, network-wide proposer effectiveness is at 99%, identical to pre-merge levels. This is based on whether proposers were able to successfully propose a block when assigned a slot. During this time, Coinbase and Lido have had the highest proposer effectiveness rate at 100%.
Validators have collected at least 12 ETH in MEV. Block builders send bids to validators through mev-boost and relayers in hopes of being selected for inclusion by the proposing validator. Regarding relays, 95% of mev-boost blocks on-chain have come from Flashbots’ relay.
③ DeFi Post-Merge
👥 Seraphim Czecker (Euler)
📈 The merge: ETHPoW trade and TWAP manipulability
The merge has introduced a unique risk to lending protocols: 100% utilization on WETH pools. The reason is a popular trade amongst whales to lend USDC and borrow WETH on Aave, Compound and Euler to maximize ETHPoW they'll receive on the ETHPoW network post-merge. But since many people are doing it, increased borrowing of WETH led to spiking APYs. Because of that, ETH shorts started repaying their debts and hence utilization normalized somewhat, meaning the market found an equilibrium.
For example, on Euler we've seen whales withdraw WETH to wait, which led to spiking borrow APYs. This led to a domino effect, as leveraged stETH/WETH longs started to bleed due to the increased cost of shorting WETH. This in turn, led to repayments of WETH debt and stETH withdrawals.
A long-term effect of the merge is manipulability of Uniswap TWAPs. Because validators will know in advance which blocks they'll validate, it is likely a validator will be able to dictate pricing for 2-5 blocks in a row. This makes TWAPs easier to manipulate and hence attack lending protocols.