Crypto Traders Bet on Ether Staking Yields Jumping to 8% Post Merge

Ether (ETH) staking is projected to become more rewarding than ever after Ethereum’s merge, the long-awaited technological upgrade.

And through Voltz Protocol’s interest rate swap pools for Lido’s staked ether (stETH) token and Rocket’s rETH, traders are actively betting on the expected bump in annualized percentage yield (APY) available for tying up ETH in the network.

At press time, most traders on the two pools were variable takers (VTs). VTs swap a fixed rate for a variable rate with the hope that the APY would double to 8% or more from the current 4% as widely predicted. According to Dune Analytics, the VTs accounted for $10 million in notional trading volume across the two pools. That’s 82% of the total notional trading volume of just over $12 million. The two pools went live on July 1 and will expire at the end of December.

«By being a Variable Taker, you’re buying exposure to the variable rate and selling the current fixed rate on Voltz Protocol,» Simon Jones, Voltz CEO and co-founder, told CoinDesk. «With so many traders choosing to be VTs, this suggests the vast majority are expecting variable rates [staking yields] to increase substantially from where they are today.»

The emergence of the decentralised finance (DeFi) interest rate swap market may help accelerate market maturity by allowing borrowers and lenders to hedge risks and facilitate price discovery of interest rates.

The two-month-old Voltz protocol allows traders to create a market for any variable rate of return. Traders in stETH and rETH pools can swap fixed for variable return and variable for fixed return with leverage merely by depositing ether as margin. Trader do not need to hold stETH or rETH to enter the trade. Traders who swap fixed for a variable are known as Fixed Takers (FTs), while those who buy variable rate exposure are referred to as variable takers.

Voltz’s swap market is analogous to the traditional interest rate market, where two counter-parties agree to exchange one stream of future interest payments for another. The most common swap is the exchange of a fixed interest rate for a floating rate, often traded against an industry benchmark interest rate, such as the London Interbank Offered Rate (LIBOR).

Variable takers can earn a 150% annual percentage yield (APY) by taking a levered bet through stETH pools, Jones told CoinDesk earlier this month.

«If the stETH rate is higher through the pool’s term than the fixed rate at the point of entering the pool, the trader will be in the money and will have successfully traded The Merge in one of the most capital efficient ways possible,» the official explainer said. Both pools are scheduled to expire at the end of December.

Variable takers dominate action in stETH and rETH interest rate swap pools. (Dune Analytics) (Dune Analytics)

The merge, slated to happen in mid-September, will combine Ethereum’s current proof-of-work chain with the proof-of-stake beacon chain that has been running since December 2020.

After the upgrade, ether’s total new issuance will likely drop by 90%, bringing a store of value appeal to the cryptocurrency. Beacon Chain stakers currently earn block rewards. Post-merge, stakers will get a share of transaction fees and revenue from MEV. And that will boost the staking yield to 8% and higher than the current 4%.

The upgrade has most market participants taking bullish exposure on ether in the spot and derivatives markets and buying stETH tokens. However, rates play may be a relatively safer option in the current macroeconomic environment.

Ether’s price and the prices of its staked derivative tokens are vulnerable to the Federal Reserve’s ongoing liquidity tightening. In other words, the merge-driven upside in ether and related tokens could remain elusive due to Fed tightening. Rates, however, could continue to stay resilient and rise as expected after the merge. The APY on staked ether has remained steady at around 4% throughout the recent bear market.

That said, leverage also brings with it the chance of forced liquidations due to margin shortages. Another source of risk is a potential drop in yields. «Rates could move against you. So while leverage increases your potential upside, it also exposes you more on the downside, meaning you could get back less than you put in,» Jones said.

Source