Bankless: "The Ethereum Merge is Overhyped" Contains Four Misconceptions

Original Title: "A Rebuttal to Jordi Alexander & The Merge"

Written by: David Hoffman

Translated by: Dong Xun, The Way of DeFi

Last week, Jordi Alexander published an article titled "Is the Merge Overhyped?" on Bankless.

Since Jordi joined Bankless and helped us uncover Terra's time bomb (about a month before its collapse), I have appreciated his rational and clear-headed thoughts on the market. Reading his pessimistic view on the merge is a good exercise, as I personally find it hard to see that perspective.

However, I believe there are some significant points that Jordi either got wrong or overstated! I have written some rebuttals to the claims in Jordi's article that need clarification.

Tl;DR

• Bearish due to low gas fees? Don't; the reduction in issuance is what matters most.
• Bearish due to excess locked ETH? Maybe… but I think this is exaggerated.
• Bearish because yields will be low? Don't; this is actually the bull case we are looking for.

Let's dive in.

Is the Merge Overhyped?

Argument 1: It's just a narrative game

Jordi's first argument is, "In the endless narrative trading opportunities in crypto, this is just another narrative trading opportunity." The crux of this argument is that "no matter how strong the fundamentals of the catalyst are, the market can always front-run the catalyst."

I think this is a cop-out. It simply states that any event will be forgotten over time, and once it's over, we move on to the next narrative.

This leaves no fundamentally bullish space for the merge. We haven't even discussed the pros and cons, and the door has already been closed.

In my view, the rebuttal to this is easy.

The Ethereum merge is one of the most significant events in crypto history since the inception of Ethereum itself. Moreover, it is fundamentally related to price and value.

If anything is significant enough to break through the "traders gonna trade" mimicry, it is the Ethereum merge.

If you don't believe this perspective, take a look at Eric Wall's Twitter poll:

Over half of the respondents believe the Ethereum merge will happen as advertised. Another 32.7% indicated that there will either be issues or it won't happen.

That is to say, 62% believe the merge will occur, while the rest think it won't or will face problems.

Now, if you are like me, Ryan, Anthony Sassano, or any Ethereum client team and core developers, you would think the likelihood of the merge happening on September 15 is greater than 95%, and that it will be successful.

If the market is pricing the success rate below 95%, then I believe the merge is not being priced in.

You can bet, but it's worth noting that those who have researched the details of the merge are more optimistic about its success than those who answered this poll.

Eric Wall's Twitter followers 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 the community.

Argument 2: Gas fees have dropped significantly

Jordi's next argument is that gas fees have dropped dramatically.

He is right; they have.

"In the last 30 days of August, the price of ETH rose by over 50%, while gas consumption was only about 1300 ETH per day."

With this, the burn rate from EIP 1559 becomes negligible, which adversely affects the narrative of ETH becoming a super sound currency.??

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

He is correct!

I completely support Jordi's argument that the era of 200+ gwei gas prices is over.

But I also believe that the current average gas price paradigm of 8-12 gwei is also low. Since 2021, we have been in a bear market. Not much new has happened.

But as cryptocurrency prices rise, gas prices will rise again. There will always be new things to do, and another bull market will come.

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

And we only need 15 gwei to achieve a net negative issuance of ETH. But more importantly, this whole thing has been exaggerated.

The merge is about the reduction in block reward issuance! It's not about burning!

A 10 gwei gas price burns about 1000 ETH per day. Proof of Stake (PoS) eliminates about 1350 ETH of issuance per day.

Who would be unhappy with low gas prices? The reduction in issuance has always been the most important thing, and burning is just icing on the cake. This impact is why some ETH bulls expect the merge to have a relatively quick effect on ETH prices: in months rather than years.

When ETH issuance drops to 0.43%, and other L1s look like this (see the image below), are we really going to say this isn't bullish?

Argument 3: Locked staked ETH will be sold off

Jordi's next argument is that the supply of staked ETH and its returns will affect the market. In turn, once unlocking occurs, there could be massive sell-off pressure that would panic investors.

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

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

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

Let me ask you, are these people:

• Eager to lock in their profits?
• Willing to endure an unknown lock-up period by staking ETH early, and possibly never selling it, as permanent bulls?

If you staked ETH when it was still below $1000, you did so within the first 6 weeks of the beacon chain going live. You were willing to take on an unknown lock-up time for about a 6-7% ETH yield.

Psychologically, I don't think this group of people is eager ETH sellers.

If someone is a low-belief ETH staker looking for a liquidity exit, they would stake on Lido (which launched in the same month as the beacon chain) so they could sell their Ethereum at any time.

And even at the current price, ETH has increased 2-4 times for the earliest stakers.

Finally, the pressure of the "sell door" opening can also be alleviated by those waiting for the merge to reduce Ethereum risk and equivalently buy Ethereum after the merge.

Argument 4: Yields will decline

Jordi believes that the staking yield of ETH is declining significantly.

"After these risks disappear, the Mall Cops staking ETH will be lucky to achieve a 1-2% annual yield after token inflation, which is even lower than U.S. Treasury bonds."

"In 2023, we will see 30 to 60 million ETH staked."

Wait, is this bearish?

Because this is actually the same as my bull case.

If ETH yields drop so low, it is because a large amount of ETH has started to be staked, and the issuance is spread among many participants. This is the situation ETH bulls want to see.

Low ETH yields mean a large amount of ETH is staked. As more ETH gets staked, the circulating supply will decrease.

This also means that DeFi's ETH yields will be high as DeFi also siphons off a large amount of ETH from the secondary market.

I find it hard to see how 30 to 60 million ETH being staked can be bearish. Because regardless of what the related yield of ETH is, a large amount of staked ETH has always been one of the core pillars of ETH appreciation.

If people are willing to accept increasingly lower yields on their ETH to the point where yields drop below 3%, it is because the asset is highly desirable, and owners are willing to accept less reward for holding it.

Moreover, if we are concerned about an oversupply from the merge, why are we still seeing the supply of staked ETH increase from the current 14 million to 30 to 60 million in 2023?

To me, this doesn't seem very pessimistic.

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