The highly anticipated Ethereum hard fork, known as "The Merge," has been successfully executed. This monumental upgrade transitions the Ethereum network from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism for validating transactions. While the initial transition proceeded smoothly, it is prudent for users to exercise caution and temporarily avoid signing transactions until the network demonstrates sustained stability, as unforeseen issues may still arise post-fork.
What Was the Ethereum Merge?
The Merge represents a fundamental overhaul of the Ethereum network. Its primary objective was to replace the energy-intensive Proof-of-Work model with the more efficient Proof-of-Stake system.
- Proof-of-Work (PoW): This older model required individual mining nodes to solve complex cryptographic puzzles, consuming massive amounts of energy to create blocks and add transactions to the blockchain.
- Proof-of-Stake (PoS): This new system eliminates miners. Instead, nodes, known as validators, stake their own Ether (ETH) as collateral to be randomly selected to create new blocks from pending transactions.
A critical reminder for users during any major network upgrade is to remain vigilant against scams. Fraudsters often become highly active, attempting to exploit uncertainty. Never engage with anyone claiming urgent action is required to "protect" your ETH due to The Merge.
The transition to Proof-of-Stake marks one of the most significant achievements in the history of cryptography and open-source development. Although the price of ETH remained relatively stable immediately following the event, the preparation for this shift was evident across markets. Key indicators included plummeting funding rates, rising open interest, a widening discount for staked ETH, and declining liquidity in the hours before the event.
The Post-Merge Ethereum Landscape
A significant debate within the crypto community centers on transaction fees. Any network that charges volatile and high fees for its use may not align with the best interests of businesses seeking to adopt it as a medium of exchange. Such friction could potentially hinder the mass adoption and acceptance of a crypto network. If Ethereum is to be used as a global medium of exchange for goods and services, fluctuating and unpredictable gas fees could create exponential friction for everyday transactions.
Derivatives Market Activity
In the month leading up to The Merge, derivatives markets dominated ETH trading activity. The ratio of derivatives-to-spot trading volume surged at its fastest recorded pace. Open interest for both BTC and ETH broke all-time highs (denominated in ETH) as traders speculated and hedged against every possible outcome.
Following the Merge, open interest on major exchanges like Binance and FTX saw slight declines but stabilized near levels seen earlier in the week. Open interest on smaller derivatives exchanges remained largely flat.
In the 24 hours preceding the Merge, funding rates across all exchanges dropped to historic lows. Notably, FTX, which typically maintains a funding rate near zero, saw its rate fall to -0.0457%. Post-merge, these rates have begun to normalize. The recovery on FTX, which was the first major exchange to credit users with the ETHW airdrop, has been particularly useful to observe.
Option expiries had been overwhelmingly bullish for months leading into the Merge. The September 30th expiry date emerged as a key focal point for investors, with nearly $8 billion in options set to expire, about 75% of which were call options. It is worth noting that the $5,000 strike price had the largest volume, the vast majority of which were calls. With ETH needing to triple in value to reach this strike, these options were poised to expire worthless.
Spot Market Dynamics
Spot market activity for ETH remained relatively subdued both in preparation for and after the Merge. Centralized exchange (CEX) trading volumes held steady, showing no signs of sustained selling pressure or a prolonged spike in activity. Hourly volume did not exceed the levels witnessed during the Terra collapse.
A notable outlier was OKX, which saw its market share of ETH spot volume jump from a stable 4% to a peak of 23% around 3 AM UTC on September 14th before returning to normal levels. FTX's market share steadily climbed from around 10% a week before the Merge to over 25% at the time of the event, while Coinbase accounted for just 3% of volume in the hour of the Merge.
Decentralized exchange (DEX) volume was also relatively quiet, although some large swaps occurred in the days before the upgrade. It's also important to highlight that Uniswap V3 remained fully functional throughout the entire process, while traders experienced issues with some centralized exchanges like FTX in recent days.
A significant trend was observed in wETH/USDC pools, where selling pressure ($890 million sells) outweighed buying pressure ($800 million buys) in the three days before the Merge. This trend reversed on September 14th, with buys ($297 million) finally exceeding sells ($280 million).
Liquidity and Market Depth
Liquidity began to deteriorate in the hours before the Merge: market depth decreased, slippage increased, and spreads widened, despite a lack of significant price movement or a surge in volume. This indicated that market makers were adopting a cautious stance ahead of the event.
Market depth across exchanges began to plummet in the hours before the Merge and continued to decline, though absolute levels were not critically low. From a U.S. exchange perspective, spreads began to increase on September 13th, with a sharp spike occurring in the early hours of September 15th.
The combination of falling market depth and widening spreads led to a significant increase in slippage for market sell orders. Slippage nearly tripled on Binance.US and more than tripled on Kraken. Similarly, Coinbase's slippage almost tripled, jumping from 0.05% to 0.135%. For a deeper analysis of on-chain liquidity metrics, you can explore more data on real-time market depth.
Staked Ether (stETH) Rebound
One of the most striking trends post-Merge was the rapid reversal of the discount for liquid staking tokens like stETH. Immediately after the success of The Merge became clear, tokens like stETH, cbETH, and bETH surged in value relative to plain ETH. While stakers cannot withdraw their ETH from the Beacon Chain for at least another six months, the immediate risk of any large-scale failure has been largely priced out.
Following this, secondary market trading volume for staked ETH also skyrocketed. Liquidity was rapidly re-added to DEX pools as confidence among liquidity providers strengthened.
A major factor in narrowing the stETH discount from -3.5% to nearly -1.5% was the addition of extra ETH liquidity into Curve's stETH/ETH pool. Before the Merge, ETH made up only 28% of the pool; afterward, this ratio rose to 34%. The more balanced the pool, the closer stETH trades to the value of ETH.
Behavioral changes among liquidity providers in the stETH Curve pool were evident post-merge. The amount of both tokens added to the pool increased significantly, particularly for ETH.
Proof-of-Work Alternatives: ETC and ETHW
With Ethereum mining now a thing of the past, miners were forced to decide on their next move. In the lead-up to The Merge, a massive shift in hashrate occurred towards Ethereum Classic (ETC), a relatively less active hard fork of Ethereum from 2016. ETC's open interest has declined since hitting a record high on September 5th, a day when its price jumped from $32 to $40. Its funding rates have also begun to recover from lows, indicating short positions were being closed. ETC's current market cap to open interest ratio is around 20, compared to over 45 for ETH, suggesting ETC's price may be more heavily influenced by futures activity in the coming weeks.
A hard fork of Ethereum aimed at maintaining the Proof-of-Work mining mechanism occurred within 24 hours of The Merge. This new chain, called EthereumPoW (ETHW), initiated an airdrop of its ETHW tokens to all ETH holders. The anticipation of this airdrop was the source of much market activity over the past month, including negative funding rates. FTX was the first major exchange to list a spot ETHW trading pair, though it heavily caveated the listing with warnings that the token could settle to zero if no sustainable chain emerged. Given this uncertainty and the token's questionable utility, a market bias toward selling was unsurprising.
Frequently Asked Questions
What was the main goal of the Ethereum Merge?
The primary goal was to transition Ethereum from an energy-intensive Proof-of-Work consensus mechanism to a more efficient and scalable Proof-of-Stake system. This reduces Ethereum's energy consumption by an estimated 99.95%.
Can I unstake my ETH now that the Merge is complete?
No. Withdrawals for staked ETH are not yet enabled on the mainnet. This functionality is scheduled to be activated during the next major upgrade, known as Shanghai, expected in the months following the Merge.
What happened to my ETH during the Merge?
Nothing changed for the average user or holder. Your existing ETH remained intact and automatically became part of the new Proof-of-Stake chain. No action was required.
What is ETHW and did I receive it?
ETHW is the native token of a new Proof-of-Work fork of Ethereum. Most major exchanges credited users who held ETH at the time of the fork with an equal amount of ETHW. However, the value and longevity of this chain remain highly uncertain.
Did transaction fees get cheaper after the Merge?
No. The Merge was a consensus layer change, not a scalability upgrade. Gas fees for transactions on the network remain dependent on network congestion. Scalability improvements are the focus of future upgrades like sharding.
How does staking work now on Ethereum?
Users can stake ETH to become a validator, helping to secure the network and validate transactions. In return, they earn staking rewards. However, as mentioned, unstaking is not yet possible until the Shanghai upgrade. To understand the validator process better, you can get advanced staking methods and insights.
Conclusion: A Quiet Success
The Merge process was often likened to changing a jet engine while the plane was still in flight. Its successful completion, without fireworks or explosions, is a testament to the skill and coordination of Ethereum's developers and community. They not only orchestrated a profound technical achievement but also effectively communicated what would happen throughout the process.
The subsequent lack of market volatility can be interpreted as a strong vote of confidence in Ethereum. The success was largely priced in. While the future will undoubtedly bring volatility, for now, the community can celebrate a hard-fought victory. The network has addressed one of its biggest criticisms: excessive energy consumption, paving a clearer path toward a more sustainable and scalable future.