One Year After the Ethereum Merge: Developments and Impacts

One year after the Ethereum merge, notable developments have occurred in terms of Ethereum's energy consumption, liquid staking, scaling solutions, regulatory concerns, and supply. Discover the impacts and future direction of Ethereum.

Posted 10 months ago in Blockchain


Image: Illustration of the Ethereum logo merged with a background of computer code and mathematical symbols

In terms of price, Ethereum is trading at approximately the same price it was when the merge happened in 2022. But that's just part of the story.


Energy Consumption

Prior to the shift, Ethereum verified on-chain transactions with the same consensus mechanism as Bitcoin: proof of work. It requires miners to compete to solve complex mathematical equations. In exchange for participating in the energy-intensive process, they earn rewards. But when Ethereum shifted to proof of stake, it meant validators, not miners, needed to pledge Ethereum to secure the network in exchange for rewards.

One of the most notable impacts was a reduction in Ethereum’s energy use. The network’s energy consumption decreased by 99.99%, according to a report from the Crypto Carbon Ratings Institute. Crypto has garnered a mainstream reputation for consuming excessive energy. It’s significant that the merge rendered those anti-crypto criticisms moot for the industry’s second-largest coin, Dermot O'Riordan, director of the Pocket Network Foundation told Decrypt. “People were like, ‘This seems fun and cool, but you’re all bucking around while the Earth is burning,” he said. “It was a genuine drag on the believability and credibility of the technology.”


Liquid Staking

Since Ethereum’s transition, the amount of Ethereum staked has nearly doubled. The total has grown 93% to 26.5 million Ethereum worth close to $43 billion, according to a dashboard on Dune created by Dragonfly Data Scientist Hildebert Moulié. That equates to one out of every five Ethereum. At the same time, concerns about centralization have been raised in the upgrade’s wake.

When it comes to liquid staking tokens, Lido Staked Ethereum ($STETH) looms large, with a market capitalization of $14 billion, according to CoinMarketCap. For reference, the second largest token by market capitalization representing staked Ethereum is Rocket Pool ETH ($RETH), with a market capitalization of $926 million.


Scaling Solutions

In order for Ethereum to achieve significant adoption, the network needs to be able to process lots of transactions in a timely way. The merge wasn't intended to improve Ethereum’s speed, but it set the stage for what’s next. The “Ethereum surge,” a suite of upgrades slated to follow the merge, is expected to improve Ethereum’s scalability.

However, scaling solutions that seek to address Ethereum’s current limitations have also become more present in crypto. Average transactions per second between all Ethereum layer-2 networks has now surpassed 50, a significant improvement from last year. The recent proliferation of layer-2 tech is partly due to a foundation the merge created in terms of security at Ethereum’s base level. “The merge indeed laid foundational bricks for further scalability enhancements,” said Nebojsa Urosevic, co-founder of infrastructure solutions provider Tenderly. “Post-merge, we've seen a bolstered commitment to layering approaches, with layer-2 solutions coming to the forefront.”


The SEC

Meanwhile, staking has emerged as a regulatory flashpoint in the U.S., where the Securities and Exchange Commission (SEC) has gone after several crypto exchanges for offering services to help users earn network rewards.

CFTC Chairman Rostin Behnam labeled Ethereum as a commodity in March. A month before, SEC Chair Gary Gensler had suggested that “everything in DeFi is a security.”


Supply & Direction

Another notable impact the merge has had on Ethereum is a decrease in the token’s overall supply. The way new Ethereum is issued versus how often it's removed from circulation—a process known as burning—has resulted in a 0.25% decrease in the total amount of Ethereum in circulation.

But in terms of the future, O'Riordan compared it to a beacon that illuminates Ethereum’s overall direction. “There’s a renewed belief in confidence that Ethereum can actually pull off these major technical upgrades and do ambitious things,” he said.

Developers have been making plans for one of Ethereum’s next big upgrades, dubbed “Dencun,” core developer Mario Havel told Decrypt in July. It includes the introduction of a feature called shard chains, which is expected to scale Ethereum to over 100,000 transactions per second once it’s fully realized. Other features in the works, such as Ethereum Account Abstraction, would effectively make managing a crypto wallet as easy as managing an email account.

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Last updated 9/15/2023, 8:24:19 PM

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