Post-Merge Ethereum can “decouple” from other crypto: Chainalysis

The blockchain analysis firm suggested that Ether’s price could lose correlation with the broad crypto market as its staking rewards and eco-friendliness are likely to drive strong institutional adoption. 

In its September 7 report titled “How the Ethereum Merge May Impact the Crypto Ecosystem,” Chainalysis explained that the network’s transition to the proof-of-stake model could make Ether a more attractive asset for institutional investors. As a result, the post-Merge cryptocurrency will become similar to an instrument “like a bond or commodity with a carry premium.”

The same point of view was shared by BitMEX co-founder Arthur Hayes, who predicted in his April blog post that Ether will hit a five-digit price by the end of 2022. “When the dust settles at year-end, I believe ETH will be trading north of $10,000,” he wrote in his lengthy essay titled “Five Ducking Digits.”

“Ether is the commodity that powers the world’s largest decentralised computer. Ether will, post-merge, feature an intrinsic yield,” he said. At the same time, Hayes mentioned that the transaction fees paid to validators and staking rewards “render ETH a bond.”

According to Chainalysis, ETH staking is expected to offer a 10-15% annual yield, which makes it an “enticing bond alternative for institutional investors” given the fact that one-year U.S. Treasury bonds offer on average just 3.5% APY. Additionally, Ether’s ESG-compliant label will make it more attractive for investors with sustainability commitments. And besides the reduced environmental impact, switching to PoS is believed to minimize the risk of over-centralization since the validator role is open to all Ether holders willing to join the pool or set up the node independently, as opposed to PoW chains where the expensive mining equipment is a must. 

Cumulative ETH staking activity, jan 2021 - Aug 2022
Image: Chainalysis

Indeed, Chainalysis data seems to confirm the trend of growing institutional adoption of Ether – the number of whale stakers with over $1 million worth of ETH has been steadily increasing since the beginning of the year 2021. It went from just under 200 in January 2021 to around 1,100 in August 2022, highlighting the immense value flowing into Ethereum staking contracts — the amount of locked ETH currently exceeds $30 billion, making Ethereum 2.0 the biggest PoS blockchain by value even before the Merge occurs.  

The Chainalysis report notes that once PoS is officially in place, staking can become an even more attractive way to earn passive income. The Shanghai upgrade, set to take place in six to 12 months after the Merge, would allow users to withdraw staked ETH, providing more liquidity to the market. Currently, there’s not enough Ether to satisfy the growing demand, so some staking services provide liquid, synthetic assets representing users’ staked ETH. However, such substitutes don’t always strictly follow the price of the underlying asset, Chainalysis warns, pointing out the June stETH/ETH’s price deviation on Curve. 

“It’ll be interesting to see if the number of institutional-sized stakers increases at a faster rate following The Merge, as this could suggest that institutional investors do indeed see Ethereum staking as a good yield-generating strategy,” the report concludes.