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• Last week marked the one year anniversary of The Merge, Ethereum’s pivotal transition to Proof of Stake which fundamentally changed the network's security model and economic policy. Post-Merge, yearly ETH issuance has fallen by close to 90% compared to the Proof of Work regime. Taking into account the burning of base fees, 65% of the days since The Merge have been net deflationary. Lower fees as of late have resulted in more positive ETH issuance days, though.

• Since The Merge, the supply of ETH has fallen by about 300K ETH or a reduction of 0.25%. However, where ETH’s supply goes from here is contingent on the strength of the fee market, as well as the rate of ETH staked, which has been receiving a lot of attention lately.

• Since the activation of withdrawals, the number of validators has increased 40% to 800k. Over 26M ETH is being staked or 22% of supply. This rapid growth has raised concern, leading to the proposal of EIP-7514, which would cap the rate of new validator additions (the “churn limit”) at 8 per epoch.

💦🔬 Tx-Level Alpha: September 4th saw the single largest transfer of ETH so far this month, with 150k ETH worth around $240M move from a wallet that had been dormant since December 2018. The funds were sent to a wallet believed to be owned by Coinbase. The transaction fee paid was $1.02.

• Ethereum liquid staking enables users to stake ETH to share in validator rewards, while continuing to access the underlying liquidity through a substitute token they receive. Bolstered by the successful Shapella upgrade to PoS, liquid staking is thriving despite bear market conditions. It overtook DEXes in Total Value Locked dominance for the first time in April 2023, and since remains the largest DeFi sector by TVL. Now liquid staked TVL sits at the same value ($20B) as in March-April 2022.

• Liquid staked derivative tokens (LSDs) represent unlocked liquidity users take to other protocols. On Uniswap, SushiSwap, Curve and Balancer combined, Lido’s stETH takes up more than half of the 50M daily LSD volume. Rocket Pool’s rETH takes 2nd place with 26%, followed by Coinbase’s cbETH with 14%.

• An LSDFi industry has blossomed to allow a range of decentralized finance operations with the many forms of liquid staked Ether. It includes dozens of primitives including lending and LSD-collateralized borrowing, yield protocols and aggregators, and an index token. LSDFi total value exceeds $257M.

💦🔬 Tx-Level Alpha: EigenLayer, a protocol that allows restaking of previously staked ETH, went live in the summer of 2023 to exuberant demand. It maintains a cap on the amount of liquid staked ETH tokens that can be deposited, the size of which can and has been increased per protocol design. Each cap expansion so far was met with a surge in deposits to fill it, and a corresponding TVL spike. The most recent cap increase in August increased EigenLayer’s TVL threefold, from $78M to $235M (currently $221M).

• Lido continues to dominate the liquid staking market (LSD) on Ethereum, commanding ~72% market share with $14B TVL. Lido's average APR (3.67%) has dipped below Frax Ether's market-leading APR since June 2023 (4.3%). Lido's uphill battle for APR is driven by Frax's two-token design where only staked frxETH receive validator rewards (where frxETH can be LPd in DeFi). Lido's suboptimal APR may be offset by its brand and reputation but is unclear when the risk-reward starts to change for depositors longer-term.

• stETH bridged to other ecosystems continues to make new ATHs at 150k ($239m) - +28% over the past 3 months driven by Lido's 668k LDO rewards so far. It's unclear how organic bridge volumes will be post-rewards but equally, it could bootstrap stETH dominance longer-term - liquidity begets liquidity.

• Lido's TVL growth this month is partially driven by SOL deposits (+270k) with total deposits ~2.82M. This comes as P2P seeks more Solana development funding. Native builder Jito is set to overtake Lido's TVL at 2.67M SOL. Lido's diversification efforts away from Ethereum to Solana are losing steam.

💦🔬 Tx-Level Alpha: Investor Mark Cuban saw one of his wallets drained on September 15th with the wallet being inactive for 5 months. 338 stETH (>$500k) were withdrawn as part of a broader hack and represented the majority of the value exploited from Cuban. The on-chain footprint implies that Cuban's private key was compromised. This serves as a reminder to ensure proper security protocols and processes when setting up and managing wallets.