One year ago, Ethereum successfully underwent one of the most significant upgrades in its history—The Merge. This transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS) has led to a dramatic reduction in energy consumption, established a deflationary trend for ETH, and introduced new economic and security challenges related to staking.
What Was The Ethereum Merge?
On September 15, 2022, Ethereum completed The Merge, shifting its consensus mechanism from energy-intensive Proof-of-Work to the more efficient Proof-of-Stake. This marked the retirement of the original mining-based system that had secured the network since its inception.
The upgrade was executed seamlessly, merging the original Ethereum Mainnet with the new PoS-based Beacon Chain. This fundamental change set the stage for a more scalable, sustainable, and secure network.
Major Achievements Post-Merge
The Merge has delivered on several key promises, most notably in environmental impact and token economics.
A Greener Ethereum: 99%+ Reduction in Energy Use
The most immediate and measurable impact of The Merge has been the drastic cut in energy consumption. Ethereum founder Vitalik Buterin has frequently highlighted this achievement.
According to the Cambridge Centre for Alternative Finance (CCAF), Ethereum’s energy usage dropped by an estimated 99.99% post-Merge. To put this into perspective:
- Bitcoin's energy consumption is often compared to that of a skyscraper like the Merdeka 118 in Malaysia (679 meters tall).
- Pre-Merge Ethereum was more akin to the London Eye (135 meters).
- Post-Merge Ethereum now has a footprint comparable to something as small as a raspberry (just 1.5 centimeters).
This monumental shift addresses one of the biggest criticisms of blockchain technology and aligns with growing global demands for sustainable digital infrastructure.
Ethereum Becomes a Deflationary Asset
A core economic change introduced by The Merge was the overhaul of ETH's issuance model. With mining abolished, new ETH is now issued only as rewards to stakers. Concurrently, the EIP-1559 upgrade continues to burn a portion of transaction fees.
Data from Ultrasound.money shows that since The Merge:
- ETH Issuance: 680,000 ETH
- ETH Burned: 980,000 ETH (approx. $1.595 billion)
- Net Annual Inflation Rate: -0.249%
This negative issuance rate means more ETH has been destroyed than created, applying deflationary pressure to the asset's supply. It's important to note that during periods of low network activity, ETH can briefly become inflationary, as seen over the past 30 days with a +0.028% rate.
Market Performance: ETH vs. BTC
Despite the successful upgrade and deflationary mechanism, ETH's market performance has not outperformed Bitcoin over the past year. Data from TradingView indicates that the ETH/BTC trading pair has declined by approximately 25% since The Merge.
This underperformance highlights that while sound tokenomics are crucial, broader market sentiment, macroeconomic factors, and relative investor demand between the two leading cryptocurrencies play significant roles in price action.
Emerging Challenges and Concerns
While The Merge's benefits are clear, the transition to Proof-of-Stake has unveiled new complexities that the ecosystem must address.
The Centralization Dilemma in Staking
A significant concern is the increasing centralization of staking power, particularly around liquid staking protocols.
Lido Finance's Market Dominance
Lido Finance (LDO) has become a dominant force in Ethereum staking. According to DeFiLlama, Lido commands over 72% of the liquid staking derivative (LSD) market. When considered as a percentage of all staked ETH (including solo stakers and other services), its share is still a substantial 32%.
This concentration of validation power in a single protocol poses a potential risk to network decentralization and censorship resistance, sparking ongoing debate within the community about whether staking services should self-limit their market share to protect the network.
Rapidly Rising Staking Rate
The number of ETH being staked has grown at an accelerating pace. Ethereum developer Tim Beiko recently summarized core developer discussions, noting that the upcoming Dencun upgrade may include EIP-7514 to address this.
Ethereum Foundation researcher Dankrad Feist has projected that if the current staking inflow continues unchecked:
- By May 2024, 50% of all ETH could be staked.
- By September 2024, that figure could reach 75%.
- By the end of 2024, nearly 100% of ETH could theoretically be staked.
Economic Implications of Ultra-High Staking Rates
A scenario where the majority of ETH is locked in staking contracts presents uncharted economic territory. The most direct consequence would be a rapid decline in staking rewards (APY), potentially approaching zero.
Even with near-zero yields, users might still choose to stake their ETH for perceived security or to use liquid staking derivatives in other DeFi applications. This could create an economic imbalance, potentially reducing the liquidity of native ETH and ironically posing a new set of security challenges.
EIP-7514 proposes to temporarily slow the inflow of new stakers by modifying the churn limit. However, developers acknowledge this is a temporary measure. Long-term solutions are still being explored, including:
- Raising the 32 ETH validator requirement.
- Monitoring the impact of restaking protocols like EigenLayer.
- Overcoming technical challenges related to a hard cap on stakers.
- Implementing MEV Burn or reducing rewards to make staking less attractive.
- Encouraging growth in alternative liquid staking protocols to decentralize the landscape.
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Frequently Asked Questions
What was the main goal of The Ethereum Merge?
The primary goal was to transition Ethereum from an energy-intensive Proof-of-Work consensus mechanism to a more efficient and scalable Proof-of-Stake system. This drastically reduced energy consumption and set the stage for future scalability upgrades.
Is Ethereum now a deflationary currency?
Ethereum can be considered deflationary under conditions of high network usage. Because transaction fees are burned (EIP-1559), when the amount of ETH burned exceeds the new ETH issued to stakers, the net supply decreases. During low-activity periods, it can still be slightly inflationary.
What is the biggest risk after The Merge?
The centralization of staking, particularly through liquid staking providers like Lido, is a key concern. If a single entity controls too much of the staking power, it could theoretically compromise the network's censorship resistance and decentralization.
How does staking work on Ethereum now?
Users can stake ETH to become network validators by running their own node with a 32 ETH deposit. Alternatively, they can use staking services or pool funds through liquid staking protocols to receive derivative tokens that represent their staked ETH and earn rewards.
Will my old ETH tokens still work?
Yes. The Merge was a backend consensus change. There was no action required for ETH holders, and no new token was created. Your existing ETH automatically became the native currency of the new PoS chain.
What are the next major upgrades for Ethereum?
The next significant upgrade is Dencun, expected to introduce proto-danksharding (EIP-4844). This aims to dramatically reduce layer-2 rollup transaction costs, making Ethereum more scalable and affordable for users.