New York –Â Investors in ether and its troubled twin stETH are anticipating a cryptocurrency milestone with trepidation: the merger.
That’s the name given to a major upgrade to the Ethereum blockchain network, on which many crypto projects are built, with the goal of making it leaner, meaner, and cleaner.
It’s elusive. The merger was supposed to happen years ago but has been postponed several times, with developers most recently cancelling plans to press the button in June, frightening investors who began to fear it would never happen.
However, market participants are now making bets that the wait will soon be over. But it’s not a sure thing.
Investors have priced in a 67 percent likelihood that the update, also known as Ethereum 2.0, will materialise by October and a 13 percent possibility by September on Polymarket, a cryptocurrency platform where users can wager stablecoins on the occurrence of future events.
According to the Ethereum Foundation, who compares the merger to upgrading a spacecraft’s engine in midflight, the merger will “ship” around “Q3/Q4 2022.”
The merge finally happening would prove a big relief for ether , which has slumped on past delays and waning confidence in the upgrade. The second-biggest cryptocurrency was last trading at around $1,200, down from just over $3,500 in April, though much of the recent pessimism about the upgrade has been swamped by wider recent market ructions.
The merge could also represent the end of an ordeal for those investors holding a crypto derivative token called staked ether or stETH, which represents ether locked up in a testing environment for the upgrade, and which is hard to redeem at scale until at least six months after the merge happens.
Yet doubters remain.
“It’s just the sheer mass of the protocol. Ethereum is just so huge that I don’t think they’re going to reach their deadline in time,” said Brent Xu, founder and CEO at Umee, which is building a base-layer blockchain for borrowing and lending.
“People are just scared that their stETH is not going to be worth anything because the Merge is probably going to take longer than expected,” said Xu.
The Stumbling Of stETH
The upgrade will see ether mining transition away from the energy-intensive proof-of-work. Ethereum’s existing execution layer will merge with the new proof-of-stake consensus system.
Any further delays would be bad news for those holding stETH, a token created by a crypto project called Lido that can be converted into ether on a 1:1 basis between six and 12 months after the merge happens.
Until then, stETH trades at a price set by the market, with most trades occurring on a trading platform called Curve.
It reached a market cap of $11 billion in May, according to price site CoinGecko, and until last month traded broadly at parity with ether.
However, when crypto markets sold off last month stETH tumbled in value to trade at around an 8% discount to ether, hurt by major selling by investors such as Celsius and Three Arrows according to public data.
The price has recovered a little – stETH currently trades at a 4% discount to ether – but has not made it back to parity, partly because of the impact of the delayed merge.
Major investors in stETH include embattled U.S.-based crypto lender Celsius.
Cryptocurrency Lending Companies
The stETH project was popular because while investors can earn interest elsewhere by “staking” their ether, to do so they must lock away a minimum of 32 ether (currently roughly $38,000) until the network upgrades to the new standard.
Lido, instead, allowed them to stake as little ether as they wished in return for yield, and receive stETH.
Yet repeated delays to the merge is testing the nerves of stETH investors.
The concern is that liquidity is fast drying up at Curve, said Ryan Shea, crypto economist at global fintech company Trakx.io. Curve’s stETH liquidity has more than halved since mid May, according to the platform’s data.
“You’re going to have to find alternative sources if you want to sell a huge amount of stETH,” Shea said, such as putting stETH as collateral in another lending protocol.
“But in this type of environment where people are looking closely at crypto lending companies, whether anyone will be prepared to take that trade, I don’t know.” – Reuters