Glassnode on-chain data to see the “historical events” of the Ethereum merger

A grand blockchain project has been successfully deployed: the merger of Ethereum. Converting the consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS) has always been an important part of Ethereum’s roadmap, and the team has been actively working on this since its inception, and is now successfully deployed, completing an important milestone .

As of September 15th at 06:46:46 UTC, after the last PoW block was mined at Ethereum block height 15,537,393, the PoS beacon link governed the on-chain consensus. The Ethereum merger was a success.

There is no better chart to demonstrate the significance of this shift than looking at Ethereum’s average block time and median block time. We can clearly see the end of probabilistic, naturally varying PoW mining and the transition to PoS engineering precision, achieving a consistent 12-second block time.

Glassnode on-chain data to see the "historical events" of the Ethereum merger

In this report, we will explore this historical event from both the trading market and on-chain blockchain metrics. We will analyze the merge event from the following perspectives:

  • Positions of leveraged traders in the futures and options markets.
  • The effect of the merge transition on consensus parameters.
  • The total amount of ETH currently staked and the distribution of stakers.
  • Simulated versus actual impact on ETH supply.

Glassnode on-chain data to see the "historical events" of the Ethereum merger

Source: Ethereum Foundation

With the Ethereum merger underway, we’re excited to introduce a new set of Ethereum Acquisition Proof Indicators, Workbench Presets, and Dashboards.

New PoS metrics:

  • Block production: slot height, time epoch height, lost blocks, orphan blocks
  • Network stability: participation rate, number of certifications
  • Validator Movement: Number of Voluntary Exits, Active Validators, Number of Slashing Events
  • Validator Balance: Total Effective Balance, Staking Validity, Average Validator Balance, Staking Deposits.
  • Validator Economics: Estimated annual issuance ROI for each validator, estimated annual issuance.

     

New Dashboard: Staking Consensus and Staking Supply Dynamics.

Workbench Presets: Net Inflation Rate, Net Supply Change, Merged Supply Dynamics, Active Validator Changes, Cumulative Exit Events, Total and Active Balance, Fixed Realization Price

Rumors come in, news come out

In our Week 32 Chain Weekly report, we describe how positions across the futures and options markets are hedged against a news event. In fact, investors have already started to sell ETH, from this week’s high of $1,777, to around $1,650 at the time of the consolidation, before collapsing to a low of $1,288 on Sunday.

The market has practically given back all its gains since mid-July. Such a sell-off was caused by a number of factors, not the least of which was traders taking profits after seeing Ethereum underperform recently. As one of a small group of assets that has performed well under prevailing macroeconomic conditions in recent months, it is quite normal for traders to sell after taking profits.

Glassnode on-chain data to see the "historical events" of the Ethereum merger

Until the merger, traders in the perpetual futures market were paying a staggering 1,200% annualized funding rate to maintain their Ethereum short positions. This is a new all-time low negative funding rate, surpassing the peak of -998% set during the March 2020 sell-off.

Funding rates have since returned to full neutrality, indicating that much of the short-term speculative premium has dissipated.

Glassnode on-chain data to see the "historical events" of the Ethereum merger

Combined, total futures open interest fell 15% from $8.0 billion to $6.8 billion, both extremes that are fairly typical in the context of the 2021-22 market. However, to keep this changing context, we have to take into account the impact of changes in the ETH price, which affects the dollar value of the ETH-denominated futures position size.

Glassnode on-chain data to see the "historical events" of the Ethereum merger

If we examine Ethereum-denominated open interest, we can see that futures open interest is actually at an all-time high, increasing by nearly 80% since the beginning of May. Futures leverage appears to have actually increased rather than decreased over the past week, suggesting that many risk-hedging positions have not been closed.

Glassnode on-chain data to see the "historical events" of the Ethereum merger

In the options market, there has been a lot of Ethereum speculation recently, with call options open interest falling by $600 million (down 10%) after the merger. There is still a total of $5.2 billion in outstanding call options position value, which is still well above the 2021 norm. The put options market experienced a more pronounced relative decline of 19%, but that was still a much smaller net position value of $294 million.

In many ways, it appears that the entire Ethereum market is still heavily utilized, leveraged, and investments are rising further despite the -22% correction in Ethereum price.

Glassnode on-chain data to see the "historical events" of the Ethereum merger

On-chain merge

The end of Ethereum’s proof-of-work era marked the immediate drop in mining difficulty to zero after the merger. The process is instantaneous, with no liquidation periods and no difficulty adjustments. The revenue of PoW miners has practically evaporated, leaving a bunch of GPU and ASIC miners looking for new uses.

Glassnode on-chain data to see the "historical events" of the Ethereum merger

As an alternative to miners, PoS utilizes a pool of validators that are programmatically organized into groups of committees and provide block proposers for every 32-slot epoch. Each 12-second period has a validator assigned to the role of block producer. However, in some cases, this validator may be offline or unreachable at the time, resulting in lost blocks.

Glassnode on-chain data to see the "historical events" of the Ethereum merger

We measure this total validator network uptime using the participation rate metric, which is the ratio between the number of blocks that were successfully produced (i.e., not lost) to the total available time slots. As you can see in the graph below, the participation rate is well over 99%, which has been the norm for most of the beacon chain so far. This would be an interesting performance metric, as more load is imposed on the chain, more validators come in.

In the weeks leading up to the merger, you can see a slight drop in the engagement rate, below the typical 99% level, at around 97.5%. After the merger, the participation rate returned to levels above 99%, suggesting only a brief disruption to some subset of validators.

Glassnode on-chain data to see the "historical events" of the Ethereum merger

The number of verifications on Chain-tip also experienced a brief drop before the merger, but also returned to the expected range of 32,000 to 38,000 verifications per hour. This could reflect a node issue at a larger staking operator, or a bug in a software client that affected numerous validators in a short period of time.

Glassnode on-chain data to see the "historical events" of the Ethereum merger

Ethereum currently has over 429,600 active validators on the network. The graph below shows the past 6 months, before and after the merge, you can see a significant increase in the gradient of new validators. More than 11,360 validators went live in September alone, showing that investor confidence is growing as the technical challenges of the merger are removed.

Glassnode on-chain data to see the "historical events" of the Ethereum merger

When validators choose to enter or leave the staking pool, they are limited by the total amount of validator churn per epoch set by the protocol. The graph below shows this cap (blue trace) and a somewhat barcode-style graph that shows the daily change in active validators. We can see that there have been several epochs in the past where the influx of validators has reached the limit cap.

The recent burst of new validator activity in September is visible to the naked eye, although it is still fairly minor relative to the more period seen in 2021.

Glassnode on-chain data to see the "historical events" of the Ethereum merger

There are currently 429,600 active validators, with more than 14.586 million ETH staked, accounting for 12.2% of the total ETH supply. The total amount of Ethereum will change over time because:

  • New deposits, and final withdrawals (after the Shanghai fork).
  • Revenue from blocks and fees (balance increase).
  • Inactivity leaks If the validator frequently misses blocks or validations (balance decreases).
  • Forfeiture in case of malicious behavior (reduction of balance).

     

The total staked balance is distinct from a new metric, the active balance, which is the portion of Bitcoin that actively participates in consensus. The valid stake per validator is capped at 32 ETH, and in the event of a leak or slash, valid stake is reduced to 1 ETH increments below this value.

The current total effective balance is 13.801 million Ethereum, and the effective rate of pledge is 94.6%.

Glassnode on-chain data to see the "historical events" of the Ethereum merger

The vast majority of pledged ETH is hosted by multiple pledge service providers, and we monitor these service providers, totaling 100.71 million ETH (69.04% of the total). The top four service providers are Lido, Coinbase, Kraken and Binance, who manage a total of 8.18 million ETH, accounting for 56.08% of the total pledged volume.

One of the latest growth staking pools we monitor, Rocketpool, is a distributed validator node operator that competes with market leader Lido. Rocketpool is still very small but growing, currently hosting 228,200 ETH, or 1.56% of the total pledged volume.

Glassnode on-chain data to see the "historical events" of the Ethereum merger

realities of supply

One of the most talked about parts of the merger is the massive drop in supply, which, combined with the burning of EIP1559, is expected to lead to some degree of ETH supply deflation.

Since the birth of the Beacon Chain on December 1, 2020, Ethereum has actually had two sources of net supply, the PoW chain and the PoS chain. In August 2021, Ethereum implemented the EIP1559 protocol, which created a burn function on the PoW chain, which has now moved to the PoS chain.

The chart below is a set of tracking records showing the daily net issuance of Ethereum under various simulated and real-world scenarios. This graph attempts to model and visualize the daily net change in Ethereum supply since EIP1559 was implemented.

  • The area chart shows the actual situation, which includes the issuance of PoW and PoS, and the burning of EIP1559, and illustrates the devaluation of PoW. A positive value ? represents a period of net inflation (the typical case), and a negative value ? represents a net supply contraction (ETH supply contraction).
  • Simulate a continuation of a PoW blockchain?, assuming that the PoS merger never happens, and assuming that 2 ETH is issued per block (ignoring uncle block rewards for simplicity).
  • Simulate a PoS-only chain? , assuming that the merge happens around the same time as EIP1559 is released in August 2021, thus ignoring all PoW block rewards after that date?. This trajectory is now consistent with the merged area chart.

     

It can be seen that the issuance rate drawn by the PoS model is significantly lower, at ~772 ETH/day, while the PoW model is ~12,500 ETH. However, we note that the current net issuance of Ethereum is still inflationary. This is mainly due to the current extremely low level of blockchain congestion and low network utilization.

Glassnode on-chain data to see the "historical events" of the Ethereum merger

Zooming in on the 1-hour chart from the consolidation event, we can calculate the net supply reduction that has occurred. From the merge to the time of this writing (4 days after the fact):

  • The net issuance of the PoW Ethereum chain should be around 48,400.
  • While the PoS chain has issued 3,893 Ethereum, the output of the PoS chain has decreased significantly by 92.8% compared to the abandoned system.

     

Immediately after the merger event, the explosion in block space demand did push up average gas fees, which created an initial 12-hour period of net ethereum supply crunch. However, as congestion is removed and fees are reduced, the overall supply of ETH continues to increase, albeit at a significantly slower rate compared to previous PoW implementations.

Glassnode on-chain data to see the "historical events" of the Ethereum merger

Summary and Conclusion

The Ethereum merger was a success, a historic merger to say the least. Years of dedicated research, development and strategy have now come together to achieve an extraordinary feat of engineering.

The on-chain analytics industry now has a plethora of new metrics to explore and characterize the new consensus mechanisms and performance of Ethereum, the world’s second-largest cryptoasset. Among them, the new supply dynamics are particularly notable, with new validators coming online (increasing issuance), burning network congestion fees through the EIP1559 mechanism, on-chain tensions and market forces have enough to direct Ethereum supply to A state of inflation or deflation.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/glassnode-on-chain-data-to-see-the-historical-events-of-the-ethereum-merger/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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