stETH/ETH price, Aug 2022
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The ethereum staking tokens, Lido’s stETH and Rocketpool’s rETH, have been falling slightly recently in relation to eth.

stETH dipped from 0.974 eth to 0.968 as of writing, when in theory it should be worth one eth and perhaps a bit more due to staking yield.

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That staking yield is expected to go way up following the Merge, ethereum’s upgrade to Proof of Stake (PoS) expected this September.

Stakers will be receiving fees on top of the network reward once the upgrade goes live, and they’ll grab the miner extraction value (MEV), which presumably will become sev, whereby stakers decide frontrunning order in defi. So bringing the staking yield to perhaps about 10% or more.

At the same time as the Merge, the forkening will go through whereby a network chain-split occurs with the current Proof of Work (PoW) ethereum network continuing to run.

This is expected to be a clean split, with replay protection, and as such the fork will have to happen on the merge block itself.

This will create two parallel universes where everything is identically cloned, one with stakers in PoS and one with miners in PoW.

This new reality, with the fork seriously proposed only in the past few days, can potentially affect things like stETH, and far more.

For stETH, some might be trying to go plain eth so that they can get the eth coin in both chains, eth in PoS and ethW in PoW.

That however has a limit as by our estimate, simply 4x-ing ETC’s price considering the current ethereum network has far more utility, ethW is probably not worth more than $200 or $300 at current eth price. So 10-20% of eth’s price following huge initial volatility.

Thus, the stETH to ethw arbitrage opportunity isn’t huge, and the cloning happens on the merge block, so it’s only at that point when it matters what assets you hold.

Of course some might be trying to frontrun as by that point stETH/ETH might have a different price, but this shouldn’t go below 0.9 eth at most.

USDt, USDc and perhaps even dai are some other potential arbitrage points because both USDt and USDc will be backed on the PoS chain, and free floating on the PoW chain.

We’ve never seen this before so, while the peg in PoS will continue to be 1:1, it might be unrealistic for it to go to 0:1 in PoW because ultimately the worth of something is whatever someone is willing to pay for it. The ‘backing’ part, as we’ve seen in fiat banking, can be irrelevant.

As an example, suppose you put 1,000 USDc in Compound to borrow, for simplicity’s sake let’s say 1eth.

This trade remains the same in PoS eth where one eth still gets you $1,000, though depending on eth price movements, but in PoW eth, the value of usdc may have fallen so much that you need just 0.00001 ethw to pay off 1,000 USDc.

That’s the theory anyway. In practice, we have demand here for these 1,000 USDc as it is debt that has to be paid back if you want the actual asset. The demand for USDc in ethW therefore is not zero, or even near zero, so it’s not clear why it’s price should be zero.

Instead, its price may well be 20 cent, to correspond with ethw’s value being 20% of eth, and if such prices are different initially, then presumably arbitrage will make sure they correspond to supply and demand.

Then there’s DAI. Its price in ethW should go up, rather than down, according to theory which would suggest that you should get some DAI, but if the DAI are not burned to keep up with collateral then its supply should be inflated so its price should go down, no?

That’s the problem with arbitraging. Everyone wants it and no one quite knows which way it will go because if everyone thinks up, then everyone arbs it to down. In this case, if DAI should go up and people do get DAI, by the time it comes to it, they’ll unload and so DAI would plunge.

Its useful therefore to be independently minded and do your own research in these sort of situations because others’ interests are against yours, and so plenty may be saying the opposite of what is the case.

We won’t be playing, but some concrete value for actual eth that might come out of all this is that we may be learning of new ‘pure’ crypto dapps.

There was LUSD yesterday, which is DAI but backed with just eth rather than also USDc and all these other stuff.

There’s RAI for today. Vitalik Buterin, ethereum’s co-founder, just minted some of it on Friday while telling the public the fork is just a money grab.

RAI, from what we understand on a very surface view, can best be described as if DAI is a hard peg to USD, RAI is a soft peg. That is, DAI ‘has’ to be 1:1 and they’ll do anything to keep it that way. For RAI, if it sometime goes to 1.20 or 0.8, it’s alright, it’s stable-ish not rigid.

That apparently has its own benefits, but the main benefit where it concerns the topic at hand is that it is pure eth collateral, and thus it will be pure ethw collateral on the new chain.

So Vitalik clearly wants to have two copies of them, one on the main-chain and one on the other chain.

Now, he is half a billionaire so it may well be he is doing this to raise awareness for RAI rather than for half a million dollars, but this goes to show that there are more conservative plays rather than guessing what to arb.

All of which means that as much as some might like to hate this fork, it does also sound exciting to see what moves and what doesn’t, what is ‘pure’ and what is ‘mixed’, while also gaining valuable knowledge in case we ever need to fork for real.

Finally, there’s the crypto arb. No other crypto will give you two coins, or a huge airdrop, anytime soon. So, a lot of wider crypto value may concentrate on eth because clearly this will probably be the summer show, and maybe not just in crypto. The finance kids will presumably be watching, Janet Yellen too, because a forking of an entire financial system has of course never been done before.





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