Just over a year ago on September 15th, 2022, Ethereum embarked on a seminal journey in its technological evolution with the implementation of The Merge. This pivotal upgrade switched Ethereum’s consensus mechanism from Proof of Work (PoW) to Proof of Stake (PoS), causing a significant shift in the network’s mechanics and spawning various effects on the cryptocurrency’s dynamics.
While implementing PoS advanced Ethereum’s technological capabilities and green footprint, it did not signal an instant price appreciation for Ether. The effects of the Merge depict a complex narrative with room for considerable future adjustments.
Defining the era is Ethereum’s move to becoming a deflationary currency, with 980,377.87 Ether burned, leading to a net supply reduction of 299,922.50 Ether, according to Ethereum analytica platform Ultrasound.money. This shift ushered in an annualized supply decrease by 0.249%.
The PoS consensus mechanism, coupled with this new deflationary model, propelled Ethereum towards the forefront of environmentally friendly blockchain technologies. By requiring market participants to hold Ether to validate transactions, and burning a portion of user transaction fees, energy consumption was significantly reduced. Data from The Cambridge Centre for Alternative Finance states that Ethereum’s energy use dropped over 99.9% from the 21 terawatt hours of electricity consumed under PoW.
However, while Ethereum’s energy efficiency and supply metrics significantly changed following the Merge and the subsequent April 2023, Shapella upgrade, Ether’s market valuation remained rather unchanged, with Bitcoin outperforming the former in the past year.
The statuses of Ethereum and Ether may lean heavily on the next upgrade, known as the Ethereum Improvement Proposal EIP4844, or “protodanksharding”. This upgrade aims to reduce gas transaction fees and increase transaction throughput – elements some experts believe are the missing keys to Ether’s valuation ascension.
While The Merge and subsequent upgrades have considerably changed Ethereum’s landscape, concerns about centralization and overall blockchain health persist. Most notably, many in the Ethereum community are wary of the control granted to liquid staking providers like Lido Finance, likely influencing the push by Ethereum liquid staking providers to impose a 22% limit rule to ensure network decentralization.
Centralization concerns also emerge with regards to the distribution of Ethereum nodes, many of which are run through centralized web providers. This issue was the major talking point at Korea Blockchain Week, where Ethereum cofounder Vitalik Buterin emphasized the need for decentralized nodes to stave off potential single points of failure.
A year on from the Merge, it’s evident that Ethereum is in a transformative phase, grappling with technical challenges and growing pains alongside promising potential advancements. The road ahead for this leading cryptocurrency remains intricate and requiring close monitoring for possible catalysts such as EIP4844 or solutions to address centralization issues. As Ethereum continues to adapt and evolve, the wider crypto and blockchain industry will undoubtedly monitor its progress.
