A year after the transition Ethereum to the consensus algorithm Proof-of-Stake (PoS), the network has become more environmentally friendly and the cryptocurrency deflationary, but the ecosystem faces a number of problems.
On September 15, 2022, developers activated the major The Merge upgrade. The mainnet merged with the PoS Beacon Chain, and the two chains became execution and consensus layers respectively.
The most radical change was the transition from Proof-of-Work (PoW) to PoS, which significantly reduced Ethereum’s energy consumption.
According to data from the Cambridge Centre for Alternative Finance, the figure fell by 99.9% compared with the previous 21.41 TWh per year. The network’s power consumption dropped from 2.44 GW to 836 kW.
Ethereum has become deflationary
In August 2021, the Ethereum mainnet underwent the London hard fork. Among other things, it included the EIP-1559 improvement proposal, which proposed burning a portion of transaction fees.
The mechanism reduced the issuance of new coins. After The Merge, the burning process accelerated significantly. According to Ultra Sound Money, since the network’s transition to PoS the supply has decreased by more than 300,000 ETH.
It was expected to positively affect the asset’s price by boosting demand. However over the year Ethereum’s price relative to Bitcoin declined by about 25%. The digital gold continues to operate on the PoW algorithm with an annual inflation of about 1.8%.
The founder and CEO of ITC Crypto, Benjamin Cowen, drew attention to the trend — after The Merge, ETH/BTC has been making lower highs and lower lows.
You may notice that #ETH / #BTC tends to lose its support levels on BTC rallies.
Many say that ETH/BTC is “holding up well” but it is still a series of lower highs and lower lows since the merge
Supply-based models (but it’s deflationary!) do not tell you anything about demand pic.twitter.com/astvExNLlo
— Benjamin Cowen (@intocryptoverse) September 14, 2023
Yet the deflationary model of Ethereum is not consistently sustainable. Over the last seven days, amid declining network activity, the market supply grew by about 3,870 ETH.
Dominance in the Ethereum ecosystem began shifting toward liquid staking protocols
After migrating to PoS, network security and coin issuance transitioned from miners to validators. The latter must run a node and stake 32 ETH.
Users with smaller amounts can also participate in earning passive income by delegating funds through validators or dedicated platforms and services.
Activated on April 13, 2023, the Shapella upgrade enabled withdrawing the locked coins, which ultimately led to a mass shift to staking. Analysts noted that the LSD protocols, led by Lido Finance, were the main beneficiaries.
According to DeFi Llama, 11.96 million ETH are locked on liquid staking platforms, roughly 10% of the total supply.
Lido’s share of the total TVL across such protocols exceeds 72%.
A rising level of control by centralized platforms has caused concern among participants. As a result, several liquid-staking services backed the Ethereum developer’s initiative under the alias Superphiz to self-limit the market share to 22%. The work on integrating the rule was announced by Rocket Pool, StakeWise, Stader Labs, Puffer Finance, The Swell, and Diva Stting.
However, the Lido community, by a 99.81% majority, voted against self-limiting. This gave Superphiz grounds to claim that the protocol intends to control the majority of validators on the Beacon Chain.
Lido voted by a 99.81% majority not to self-limit. They have expressed an intention to control the majority of validators on the beacon chain.https://t.co/T16rTdM3gm
— superphiz.eth ???️ (@superphiz) August 31, 2023
Vitalik Buterin called node centralisation one of the key problems
With sufficiently high data throughput requirements, Ethereum validators began to rely on centralized cloud services to run nodes.
According to Ethernodes, 58.7% of the 5,901 active nodes run on Amazon Web Services. Another 6.7% are on Hetzner Online, 5.2% on Google Cloud.
In experts’ view, this situation makes the second-largest cryptocurrency vulnerable to a centralized single point of failure.
Ethereum co-founder Vitalik Buterin called the situation one of the network’s key problems. He sees a solution in cheaper and simpler maintenance of nodes using affordable hardware. However, purely technical constraints are unlikely to allow this for another 10–20 years, the expert acknowledged.
As the anniversary of The Merge approached, Buterin shared his view on the future of the Ethereum ecosystem.