A Different Way to Trade the Merge

Ethereum Foundation’s Tim Beiko laid out a four-step roadmap that places the Merge date on the week of Sept. 19


blockworks exclusive art by axel rangel


key takeaways

  • In response to anticipation surrounding the Ethereum Merge, Voltz Protocol launched interest rate swap pools for staked ETH on Lido and Rocket
  • Interest rate swaps (IRS) on staked ETH allow traders to bet on Ethereum’s ability to deliver higher yield post-Merge

In a recent tweet from the Ethereum Foundation’s Tim Beiko, Tim laid out a four-step roadmap that places the Ethereum Merge date on the week of Sept. 19. The success of previous testnet launches has many Ethereum investors hopeful that the Merge will happen by the end of the year.

In response to this increased anticipation, Voltz Protocol launched interest rate swap pools for staked ETH on Lido and Rocket. These pools offer a different way to trade a 2022 Merge. Instead of previous tactics based on the price of ether, this one is all about yields.

Some market observers believe staking yields could rise by 2x to 3x. According to Blockworks Research, a 4.9% yield could turn into 10.25% if total staked ETH remains the same after the Merge. 

Read more: The Investor’s Guide to The Ethereum Merge

Of course, multiple variables could produce different results, including a postponed Merge. Regardless of thesis, bullish and bearish spectators have various tactics they can take to trade the Merge.

Previous ETH merge trading tactics

Before launching interest rate pools for liquid staked ETH, traders had three fundamental approaches to trading the Merge. They could either stake ETH, buy staked ETH at a discount in an arbitrage trade, or use options. The first two tactics are for bullish investors who are waiting for Ethereum to one day merge with the proof-of-stake Beacon chain. It’s a play not confined to a specific time frame.

Using options, however, allows traders to bet on the Merge before the option expiration date. But unlike the first tactic, options trading has nothing to do with predicting future yields. It is a trade that predicts the future price of ether. While the Merge is undoubtedly a significant event for the cryptocurrency, it isn’t the only variable affecting its price. A successful Merge may even be a sell-the-news event. 

But even if the price of ether drops post-Merge, interest rates on staked ETH may still rise, benefiting anyone holding staked ETH or staking ETH.

Trading ETH staking yields

According to Voltz Labs, interest rate swaps (IRS) on staked ETH allow traders to bet on Ethereum’s ability to deliver higher yield post-Merge. But unlike holding staked ETH, it offers investors the potential to access leverage on those yields. Voltz Protocol was one of the first to pioneer this financial instrument in DeFi. The experts at Voltz Labs sat down with Blockworks to explain this trade in greater detail.

On the Voltz Protocol, IRS trading has two sides. One is a fixed taker (FT), where traders swap a variable rate for a fixed rate of return. On the other side of the trade is a variable taker (VT) who swaps a fixed rate and winds up with a variable rate of return.

For example, if a trader is bullish on the Ethereum Merge having a positive impact on rates, and wants to expose their yield to leverage, they would consider taking the variable rate. To do this, they would deposit ETH as margin to cover the fixed rate of their position. If variable rates go up beyond the fixed rate they have “sold”, they would generate yield. 

Voltz Labs emphasized that leverage plays an important role in IRS trading, primarily because movements in rates tend to be small. Therefore, the variable taker’s ability to make an attractive return in this scenario may depend on the leverage used on their deposit. They explained that adding leverage means more potential upside, but it also increases downside risk, making these tools better suited for experienced traders. 

On Voltz Protocol, traders only need to deposit the underlying token (ETH) to enter positions in the stETH or rETH pools. This is due to the way the protocol synthetically conducts the swaps, allowing for a high degree of capital efficiency as well as flexibility for traders, liquidity providers, and developers. Moreover, Voltz Risk Engine helps traders analyze the risk of using leverage.

If a trader is bearish on the Merge’s outcome, they would consider a fixed taker position. In this instance, they would take the fixed rate offered on Voltz Protocol. This could offer a hedge in the case that the Merge is not able to deliver on yield expectations. 

Betting on a 2022 Merge

Since the two staked ETH IRS pools expire at the end of 2022, variable takers are essentially betting on a 2022 ETH Merge. If staked ETH yields do go up this year, variable takers in these pools could see attractive rates of return.

A recent Voltz Labs’ post on trading the Merge expands upon the opportunities and risks of interest rate swaps and walks through a sample trading strategy.

The Merge is arguably a make-or-break moment for the Ethereum protocol — so much so that alternative layer-1 blockchains have emerged in doubt of its promise to deliver sustainability. The outcome will likely not be so black and white, but the stakes are undoubtedly high. These new staked ETH IRS pools offer experienced investors with a rich and comprehensive understanding of the Merge the ability to put their thesis to the test. 

This content is sponsored by Voltz Labs.

Disclaimer: Nothing in this sponsored article and Site constitutes professional and/or financial advice, nor does any information on the Site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. Blockworks is not a fiduciary by virtue of any person’s use of or access to the Site or Content.

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