Crypto traders are betting on Ether staking yields increasing to 8% after the merger.
After the long-awaited technical advancement of Ethereum’s merger, staking of Ether (ETH) is anticipated to become more lucrative than before.
Additionally, traders are aggressively wagering on the anticipated increase in annualized percentage yield (APY) available for tying up ETH in the network using Voltz Protocol’s interest rate swap pools for Lido’s staked ether (stETH) token and Rocket’s rETH.
Most traders on the two pools were variable takers at the time of publication (VTs). In the expectation that the APY would increase from the present 4% to 8% or more, as was widely projected, VTs switch from a fixed rate to a variable rate. Dune Analytics estimates that the VTs were responsible for $10 million in notional trading activity between the two pools. That amounts to 82% of the slightly over $12 million in total notional trading volume. On July 1, the two pools went online, and they will finish at the end of December.
According to Simon Jones, CEO and co-founder of Voltz, “by becoming a Variable Taker, you’re purchasing exposure to the variable rate and selling the present fixed rate on Voltz Protocol.” The fact that so many traders choose to become VTs indicates that the bulk of them anticipate variable rates (staking yields) to rise sharply from their current levels.
By enabling borrowers and lenders to reduce risk and expedite interest rate price discovery, the introduction of the decentralised finance (DeFi) interest rate swap market may contribute to an acceleration of market maturation.
The Voltz protocol, which has been around for two months, lets traders establish a market for any variable rate of return. By placing ether as margin, traders in the stETH and rETH pools may leveraged swap fixed for variable return and variable for fixed return. To join the transaction, a trader does not need to own stETH or rETH. Fixed Takers (FTs) are traders who exchange fixed rates for variable rates, while variable Takers are traders who purchase variable rate exposure.
Similar to the conventional interest rate market, Voltz’s swap market involves two counterparties agreeing to swap one stream of future interest payments for another. The most frequent swap is the conversion of a fixed interest rate to a floating rate, which is often traded against an interest rate set as the industry standard, such the London Interbank Offered Rate (LIBOR).
Jones said earlier this month that by taking a levered bet via stETH pools, variable takers may make a 150% annual percentage yield (APY).
The official explanation said, “The trader will be in the money and will have successfully traded The Merge in one of the most capital efficient ways available if the stETH rate is greater across the pool’s duration than the fixed rate at the moment of joining the pool.” The end of December is the planned expiration date for both pools.
The proof-of-work and proof-of-stake beacon chains for Ethereum will be combined during the mid-September merge, which is scheduled to take place.
After the update, ether’s total new issuance will probably fall by 90%, giving the coin a store of value appeal. Block rewards are presently paid to Beacon Chain stakers. Stakeholders will get a portion of transaction fees and MEV income after the merger. And that will increase the staking income from its present level of 4% to 8%.
The majority of market players are purchasing stETH tokens and taking bullish positions on ether in the spot and futures markets as a result of the upgrade. However, given the present macroeconomic context, rates play could be a comparatively safer choice.
The continuous liquidity tightening by the Federal Reserve puts a strain on the price of ether as well as the values of its staked derivative tokens. In other words, owing to Fed tightening, the merger-driven upside in ether and associated tokens may continue to be illusive. However, rates may remain robust and increase as anticipated after the merger. Throughout the most recent weak market, the APY on staked ether has been constant at roughly 4%.
But leverage also increases the likelihood of forced liquidations because to margin deficiency. A probable decline in yields is another risk factor. “Rates could change in your favor. Leverage boosts your potential gain, but it also increases your vulnerability to the fall, which means you risk getting back less than you invested “Jones said.