Ethereum's One-Year Anniversary of the Merge: Energy Consumption Plummets by 90%, Deflation Achieved, Surge in Stakers Raises Concerns
Ethereum successfully completed the major upgrade, The Merge, a year ago, resulting in a drastic -99% reduction in energy consumption. Currently, ETH is in a deflationary state with negative issuance. However, concerns such as the surge in staking and centralization of nodes still remain to be addressed.
Table of Contents
Ethereum Completes One-Year Anniversary of The Merge
Ethereum completed The Merge on September 15, 2022, transitioning the consensus mechanism smoothly to Proof of Stake (PoS) and officially retiring the Proof of Work (PoW) that had been running for over seven years.
Recap: Ethereum Merge News Compilation | Vitalik Buterin's Post-Merge Statements, Last PoW Block Info, First PoS NFT
As of now, the two main highlights post-Merge are deflation and energy consumption. The significant decrease in energy consumption post-Merge has been emphasized by Ethereum's founder, Vitalik Buterin, multiple times.
The Cambridge Centre for Alternative Finance (CCAF) also cited data indicating that Ethereum's energy consumption has decreased by -99.99%, making it thousands of times lower than Bitcoin.
To put the energy consumption into perspective:
Bitcoin: The world's second tallest building, Malaysia's Merdeka 118, at 679 meters high.
Pre-Merge Ethereum: London Eye Ferris Wheel, 135 meters high.
Post-Merge Ethereum: A raspberry, 1.5 centimeters in size.
Ethereum Moving Towards Deflation
Data from Ultrasound.money shows that since the Merge, Ethereum has:
ETH Issuance: 680,000 ETH
ETH Burned: 980,000 ETH, approximately $1.595 billion
ETH Inflation Rate: -0.249% per year
However, Ethereum may still experience inflation in the current market downturn, with an inflation rate of +0.028% over the past 30 days.
ETH Price Lags Behind BTC
Despite Ethereum's deflationary aspect and analysis such as the Triple Halving before the Merge, ETH's price performance over the past year has been lower than that of BTC.
The Magical Phrase Expected During the Ethereum Merge, What is The Triple Halving?
According to TradingView, ETH has dropped approximately -25% against BTC since the Merge.
In honor of the one year anniversary of “The Merge” pic.twitter.com/CgrFwr2bWR
— ₿ Isaiah⚡️ (@BitcoinIsaiah) September 13, 2023
Post-Merge Concerns: Centralization of Nodes, Excessive Staking Rate
I. Lido Dominates the Staking Market
The high proportion of staking in the Lido Finance LDO protocol has always been a focus of concern for Ethereum developers and users.
Data from DeFiLlama shows that Lido's staking liquidity dominance in Ethereum is as high as 72.26%, or approximately 32% when including other independent stakers and staking service providers.
Whether staking protocols should self-limit for protocol security has also sparked discussions:
II. Surge in Stakers, Ethereum's Dencun Upgrade or Limiting New Stakers
Ethereum developer Tim Beiko summarized the core developer meeting content on the 15th, indicating that support for EIP-7514 may be included in the next upgrade.
Similarly, Ethereum Foundation researcher Dankrad Feist, who also supports the proposal, pointed out that ETH staking deposits have been steadily increasing post-Merge. If this trend continues, they anticipate:
May 2024: 50% of ETH total supply will be staked
September 2024: 75% of ETH total supply will be staked
December 2024: Potentially reaching 100%
III. What Happens When "Liquid Staking ETH Market Cap > Unstaked ETH"?
He believes this is an unknown economic territory, where the staking yield is likely to become very low, even approaching zero.
However, even with near-zero yields, users may still stake their assets, posing a security threat to the Ethereum mainnet. EIP-7514 is just a temporary solution, and solutions need to be found before staking yields become too low. He has envisioned several possible approaches:
Increasing the 32 ETH staking cap
Observing if re-staking protocols can bring about change
Solving the technical challenge of staker quantity limits
Considering MEV Burn or reducing rewards to reduce staking attractiveness
Assisting other liquidity staking protocols to break Lido's dominant position