Stakers have always been and will continue to be natural sellers of Ether Futures and perpetual futures, and the amount of hedging will increase as yields from staking go up.
The Ethereum Merge, which happened on Thursday, made some changes to the way the blockchain is built. These changes will make the blockchain more environmentally friendly and limit the amount of its native token, ether (ETH).
Traders say that one effect of the upgrade is that futures market activity will now be closely linked to staking yields. Staking yields are rewards earned by locking ETH in the network in exchange for a chance to verify transactions using the proof-of-stake (PoS) consensus mechanism.
The more people who bet, and the more people who want to short or sell futures, the bigger the reward for betting. That’s because staked ether can’t be withdrawn until the next upgrade, called Shanghai fork, which won’t happen until the middle of 2023. Staked ether will earn rewards in ETH, which leaves stakers vulnerable to possible drops in the price of ether. So, they are likely to protect themselves against ETH by selling futures contracts tied to ETH.
“Ether Futures and perpetual futures have always been easy for takers to sell. Because of this, the number of open positions is so high, and it will only go up if the yields for staking go up “Zaheer Ebtikar, portfolio manager at crypto hedge fund LedgerPrime, told CoinDesk.
After the PoS Beacon Chain, which was launched in December 2020, merged with the Ethereum mainnet, which used a proof-of-work (PoW) system in which miners solved algorithmic problems to validate transactions in exchange for rewards, Ethereum’s network switched to the PoS system on Thursday. In other words, the new validators are called “stakers.”
Even though the Merge has stopped a lot of miners from selling on the spot market, it could bring more sellers to the futures market. This could cap the basis, which is the difference in price between the futures market and the spot market, or push the futures market into backwardation.
Backwardation is when futures trade at a lower price than the spot price. This is sometimes seen as a sign of weak demand from institutions. But the possibility of backwardation due to more staking is probably not a sign of weak demand.
“For Ethereum, the futures curve could trade in backwardation in the future,” Ebtikar said.
Jeff Anderson, who is the chief investment officer at a quantitative trading firm and liquidity provider called Folkvang Trading, says that staking yield could keep ether futures in backwardation.
“It’s really two separate stories. With bitcoin, it’s much easier to just buy futures for convenience (since you don’t have to worry about keys, etc.) and to save money on margins. This is why the curve is in contango “Anderson told CoinDesk.
“With ETH, staking yield is very attractive, which is > [greater than] convenience yield, so the curve tends toward backwardation,” Anderson said.
Ether Futures is likely to pick up
According to data from Glassnode, more than 13.7 million ETH was locked in the so-called “staking contract” before the Merge.
Daniel Chen of Sequoia Capital says that the so-called “real staking yields” will go up in the coming weeks as a result of the Merge’s effect on net ether issuance (inflation) and the fees paid to validators or “stakers.” Together, these factors will cause a drop in the number of new ethers being issued, which will cause inflation to slow down.
“As inflation goes to zero after Merge, real yields will match nominal yields. Also, miners won’t be around anymore, so the fees (called “tips”) they get paid directly to prioritize transactions will now go to validators “Chen said this in the Merge guide, which came out on September 13. “Because of this, real staking yields are expected to go from 0% before the merge to 7% after the merge.”
“We expect the number of bets to go up right away,” Chen said.