A Comprehensive Look at Ethereum and The Merge: Part Two

All eyes are on the Ethereum merge this week as the world’s largest smart contract platform is poised to transition from proof-of-work (PoW) consensus to proof-of-stake (PoS). In part one of our overview of Ethereum and the merge, we looked at how the forthcoming reduction of annual ETH issuance is expected to drastically increase the probability of daily net-deflationary issuance post-merge, even when considering the year-to-date (YTD) lows in on-chain volume that we saw in August. As it turns out, the supply dynamics of ETH and its projected staking yield will be highly dependent on transaction volume, which determines both the amount of gas fees burnt and the amount paid to validators. 

One important factor we had excluded from our initial calculations for simplicity was the impact of maximum extractable value (MEV), which refers to the amount of value that can be extracted through strategies such as arbitrage and liquidations. Over the past two years, the Flashbots MEV research team has optimized the process for extracting MEV by providing software that allows for coordination between miners and MEV searchers, reducing the prevalence of congestion-inducing priority gas auction (PGA) bots at the same time.