One year after Ethereum’s monumental transition to a proof-of-stake (PoS) consensus mechanism, the second-largest cryptocurrency by market capitalization has witnessed a dramatic drop in energy consumption and improved network accessibility. Nevertheless, several technical challenges continue to shape the path ahead.
The Ethereum Merge occurred on September 15, 2022, a historic event that united the Ethereum mainnet with a separate proof-of-stake blockchain known as the Beacon Chain.
The most profound transformation brought about by the Merge was the shift from an energy-intensive proof-of-work (PoW) consensus mechanism to PoS. This transition resulted in a significant reduction in Ethereum’s overall energy consumption. Data from The Cambridge Centre for Alternative Finance reveals that Ethereum’s energy usage has plummeted by more than 99.9%, down from the approximately 21 terawatt hours consumed during the PoW era.
In addition to consuming less power, the Merge led to Ethereum becoming economically deflationary. This means that the issuance of new Ether (ETH) to secure the network has been outpaced by the amount of ETH permanently removed from circulation.
Ultrasound.money data shows that since the Merge, over 300,000 ETH (worth $488 million at current prices) has been burned. At the current burn rate, ETH’s total supply is decreasing at a rate of 0.25% per year. Despite expectations of a substantial increase in ETH’s price in response to this deflationary pressure, various macroeconomic factors, such as the banking crisis and rising inflation, have tempered those hopes. Notably, Bitcoin outperformed ETH in the first quarter of the year, seemingly benefiting from traditional financial instability caused by the banking crisis.
Beyond price considerations, the primary focus of the proof-of-stake upgrade was the introduction of stakers to secure the network, replacing miners. The subsequent Shapella upgrade in April 2023 prompted a significant influx of ETH into staking. Liquid staking providers like Lido and Rocket Pool were among the key beneficiaries. Liquid staking providers have since dominated the Ethereum landscape, with over $19.5 billion worth of ETH currently staked via liquid staking protocols, according to DeFiLlama data.
Lido stands out as the largest staking provider, commanding a 72% share of all staked ETH. However, while many saw the transition to staking as a means to eliminate the need for expensive and complex mining hardware, concerns have arisen regarding the level of control granted to staking providers, particularly Lido Finance.
Liquid staking has prompted at least five Ethereum providers to advocate for a 22% limit rule to ensure network decentralization, although Lido Finance declined to participate. Lido’s decision not to self-impose limits, coupled with its substantial share of all staked Ether, has sparked concerns about the potential centralization of validation within the Ethereum network.
Lachlan Feeny, CEO of Labry, acknowledged that while liquid staking is beneficial for network governance accessibility, it has introduced its own set of challenges. He pointed out that Lido currently controls over 32% of all staked Ether, valued at over $14 billion. Despite the challenges, Feeny expressed confidence in Ethereum’s long-term prospects with liquid staking.
Feeny also highlighted the pressing concern of growing regulatory pressure on crypto and blockchain in the United States, which could have far-reaching implications for Ethereum and the global blockchain industry if not addressed.
Besides staking, the issue of client diversity remains pivotal. Vitalik Buterin identified six key challenges to address centralization concerns during a presentation at Korea Blockchain Week on September 5. Currently, the majority of the 5,901 active Ethereum nodes are hosted by centralized web providers like Amazon Web Services, posing a potential centralization risk.
Buterin’s solution involves statelessness, a concept aimed at reducing data requirements for node operators to near-zero, thus making it more accessible for everyday individuals to run nodes and enhancing Ethereum’s long-term decentralization. However, he acknowledged that these challenges may persist for another decade or two before being fully resolved.