Quasi-experimental research and spillover effects on Ethereum Merge

Abstract

This article investigates the Ethereum Merge, which occurred on 15 September 2022, and we employ the time-series difference in differences (DiD) model and vector autoregression (VAR) models and analyse how the protocol change from proof-of-work to proof-of-stake (PoS) affects the dynamic relationship between cryptocurrency returns and network factors. The results show that the Merge caused a structural change between Ethereum and Bitcoin networks. The network factors of Ethereum show a significant increase compared to Bitcoin, the cointegration has been strengthened and the lag length is shortened after the Merge. The spillover effect on the Bitcoin network can be seen from both DiD and VAR, indicating the increasing impact of the Ethereum network on Bitcoin. The concern of losing the number of participants due to the implantation of PoS on cryptocurrency is not apparent on Ethereum Merge, and it increases the investors’ attention and involvement.