Excitement's buzzing! Ethereum's merge is less than a month away. When do I take profits on ETH? How will The Merge affect Layer 2 projects? I answer below.
Today We’ll be Covering:
- Ethereum. I will answer a few questions about ETH as we head into the Merge.
- AMM’s. Most aren't profitable - some ideas.
- Velodrome Funds Stolen. An insider stole $350k from the team.
- DeFi Bits. Spirit V2 is here, Arbitrum launches a new chain, and MakerDao is considering some major moves.
Let’s Dive in!
- Total Crypto Market Cap: $1.17T (-1.4%)
- BTC Price: $23,431.10 (-2.2%)
- ETH Price: $1,863.71 (+.6%)
- TVL in DeFi: $65.08B
- Fear & Greed: 30 (FEAR)
"It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for." — Robert Kiyosaki
❓ Questions About Ethereum
Last week, I asked if anyone had any questions about DeFi. Almost all the questions were based around Ethereum. I'm not surprised since the Merge set to happen on September 15th, 2022.
Question: If the Ethereum merge will solve the problem of higher gas fees and scalability, what will be the fate of Layer 2s that are built for this purpose?
This is wrong and a common misconception. The Merge will not lower gas fees and increase scalability. The Merge transitions Ethereum from Proof of Work to Proof of Stake. This will reduce energy consumption by 99.95%.
Ethereum will still rely on Layer 2’s (such as Optimism, Arbitrum, Starkware, etc) to scale. And eventually, Ethereum will implement sharding technology to scale.
Question: how do you evaluate risk going into the eth merge against a tight monetary backdrop?
I don’t view ETH as a short term trade - it’s a decade+ hold for me. So a tight monetary policy doesn’t affect anything for me.
The biggest risk is if the Merge fails or gets delayed. Then you could see ETH drop to sub $1k. But I trust the developers will figure it out and relaunch it.
I have no clue where the market's heading for the rest of this year.
Question: is it fair to evaluate Optimism (ETH Layer 2) as a higher beta version of eth going into the merge?
Higher beta means it’s riskier but can provide higher return potential.
The main risk for Optimism is competition. Optimism faces stiff competition now through Arbitrum, Polygon, Starkware, and other Alt layer 1s.
Now, is that risk worth the reward? Not for me.
Ethereum's like Las Vegas. And all these Layer 2 solutions are different casinos fighting against each other. I rather bet on Las Vegas overall, than try to pick which casino will win.
So don't replace ETH with Optimism. But if you have ETH already, you can add OP to your portfolio.
Question: When do you take profits on your ETH?
I don't take profits on my BTC / ETH.
Why? Because they ARE the profits to me. Governments will keep printing fiat, while these are scarce assets. I'm fortunate enough to not need to cash out to pay for my living expenses.
This is why cash flow is important in Crypto. You don't want to have a few bad months, and have to sell off your Crypto to pay rent.
Question: Are there any interesting plays with ETH?
Staked ETH is trading at a discount now.
Lido's stETH: $1812.97
ANKR's AETHC: $1785.74
Keep in mind you're taking on some additional risk.
Question: Will there will be huge sell off of ETH after the merge?
Some people believe that ETH’s price will tank after the merge.
1. By the rumor, sell the news is a classic strategy. People will acquire a stock, and once the news or event happens, they’ll sell it for a profit. Some people are anticipating this will happen.
2. Misconception: Staked ETH unlock.
There’s roughly $21b in Ethereum staked now. Some people fear that once the Merge happens, all this staked ETH is going to flood the market. It won’t.
Staked ETH won’t be unlocked at the Merge.
It'll start being unlocked after the Shanghai hard fork (expected to take place 6-12 months after the Merge). And even when it unlocks, it’ll be gradual and not all at once.
Have you ever talked to an ETH maxi before? These mofo's are more into ETH than Gollum is into his precious. They’d cut off their pinky to be followed by Vitalik on Twitter. Most are not selling anytime soon.
2 things I’m bullish on:
- Staking ETH APR will increase. Instead of paying miners, fees will gradually start going to validators.
- Institutions will feel safer. The merge has always been a risk. Once we’re over that hill, then institutions should feel more comfortable pouring money into ETH.
Keep in mind these are all my opinions. I have different goals and circumstances than you.
👨💻 The Hiring Edge
Looking for a job in Web 3? I got you covered.
Interesting Jobs on my Job Board:
• Head of Growth at Nested
• DeFi Content Creator Intern at Treehouse
• Rust Developer Web 3 at Solana
Head over to the job board to see 149+ jobs in Web 3.
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📊 Chart of the Week
Some of the top companies in the world are actively investing in Blockchain technology.
💸How AMM’s Can Become Profitable
Automated Market Makers (Also known as DEX’es) are the bedrock of DeFi market. Without it, people can’t easily trade between two tokens on-chain.
There is one problem: the majority of AMMs aren’t profitable. They’ve gained traction through token emissions, but it’s not sustainable in the long run. Eventually, the AMMs have to grow up and turn into a profitable business.
Big Volume, Big TVL, Small Profit
Uniswap is the largest AMM in DeFi by far.
As of August 2022, the protocol generates on average $7m fees per week but isn’t making any real profit. That’s because liquidity providers (LPs) are receiving all of the transaction fee that the protocol charges.
The obvious solution is to turn on the fee switch.
Right now there's a .3% to trade tokens on Uniswap.
- All of the fee goes towards Liquidity providers.
- If this fee switch were to turn on, .25% would go to the LPs, and the .05% would go towards Uni token holders.
0.05% doesn’t sound like much, right?
Below is how much Uniswap would’ve earned if they turned on the fee switch (assuming a 0.05% flat fee) since the beginning of 2022.
These are some serious numbers.
There are risks though.
1. Security Risks. Any revenue sharing mechanics might classify an asset as a security by the SEC.
2. LP's move elsewhere. Liquidity Providers rent their liquidity for a fee. What happens if you lower the fee? They might go somewhere else that will pay more. This could cause Uniswap to slowly lose its dominance.
Other Possible Revenue Streams
There are other ways that AMMs can experiment with to generate additional revenue streams. Here are some ideas I have.
1) Disloyalty Fee
LPs are charged with a penalty fee every time they withdraw capital before the expiry date. This provides a more predictable recurring revenue for the protocols.
2) Project Exclusivity
Orca was the largest DEX in Solana by daily active users. Then Stepn decided to stop using Orca and built its own AMM instead.
This shows that entering into an exclusive partnership with a highly popular protocol such as Stepn (or Axie back then) can be key to winning more market share.
3) Concentrated Liquidity + Protocol Owned
With concentrated liquidity, AMMs require significantly less capital to facilitate larger trading volumes. By having a concentrated liquidity model and becoming its own LP, an AMM can get to profitability real quick.
Lfinity, a project in Solana, is already doing this — and based on a writing done by @durdenwannabe.
It’s currently one of the most profitable (if not only) AMMs in Solana.
It’ll be interesting to see how AMM’s adapt in the upcoming years.
About the Author: Marco is a Research Director at DAR, a crypto market data & research firm that works with institutions the likes of FTSE Russel and Bloomberg. He also writes crypto analysis and musings on his personal blog, Pensive Pragmatism.
📰 The Fast Five
Coin Center May Challenge Tornado Cash Sanction. Crypto policy non-profit Coin Center announced that they are preparing to challenge the U.S. government’s Tornado Cash ban in court. Coin Center argued that smart contracts cannot be sanctionable entities.
Ethereum’s Final Testnet Merge Goes Live on Goerli. The third and final testnet merge before the Ethereum blockchain converts to proof-of-stake (PoS) has successfully been completed. The mainnet Merge is expected to happen around September 15 2022.
BlackRock Launches Spot Bitcoin Private Trust. The world’s largest asset manager has launched a new private spot Bitcoin (BTC) trust. The fund aims to track Bitcoin’s performance.
Jump Crypto Plans to Build New Validator Client for Solana. Jump Crypto plans to become the first company aside from Solana’s team to build a Solana validator client. The main goal of this is to boost scalability, decentralization, and reliability for the Solana network.
Acala Stablecoin Collapse After Parachain Exploit. Polkadot’s DeFi Hub, Acala Network, collapsed to zero after hackers exploited a bug in a newly deployed liquidity pool to mint 1.28 billion tokens. The team immediately stopped swaps and cross-chain transfer after the incident.
💻 DeFi Bits
MakerDAO Founder Weighs Dropping USD Peg. MakerDAO’s founder, Rune Christiensen, pondered the possibility of abandoning the DAI peg to the USD. Banteg implied that this means Maker would sell its USDC for ETH. Ethereum co-founder Vitalik said the plan is “a risky and terrible idea."
Compound Multi-chain Comet Upgrade is Ready. Ethereum-based lending protocol Compound is getting ready to launch its Comet upgrade. The upgrade will mark the transition for Compound to go multi-chain.
Velodrome Team Wallet Exploit. Velodrome discovered that $350,000 of funds was stolen by a team insider named Gabagool. It has since been recovered. The crazy thing is Gabagool had an amazing reputation in the space. Why steal?
Arbitrum has launched Nova. It’s a new chain that is optimized for social apps and gaming.
SpiritSwap has rolled out their V2. It’s an overhaul of the fee structure which aims to give as much value back to InSPIRIT holders and protocols.