The transition of Ethereum from Proof-of-Work (PoW) to Proof-of-Stake (PoS), known as "The Merge," occurred over a year ago. This fundamental shift introduced the concept of "staking," a new method for adding and approving transaction blocks to the blockchain.
Under the old PoW model, miners competed to add blocks by solving complex cryptographic puzzles. Now, in the PoS model, Ethereum validators stake 32 ETH on the network and are randomly selected to propose new blocks. In both systems, miners and validators are rewarded with ETH for successfully adding blocks to the chain.
While staking has drastically reduced Ethereum's environmental footprint, the network continues to face challenges related to centralization, censorship, and the potential exploitation of certain infrastructure intermediaries. Here are the five most significant changes in the Ethereum ecosystem since The Merge.
A 99.9% Reduction in Energy Consumption
The Merge overhauled the network's consensus mechanism—the system its decentralized community of operators uses to secure the network and process transactions. The old PoW model relied on an electricity-intensive mining system where operators essentially competed by consuming computational power.
The shift from crypto mining to staking was projected to drastically reduce Ethereum's energy consumption by completely phasing out the energy-intensive systems previously used to generate blocks and secure the network.
Pre-Merge, Ethereum's energy consumption was comparable to that of a small country, a key point of contention for early critics of NFTs and DeFi. For context, Bitcoin, which still uses PoW, consumes energy on par with the nation of Singapore, according to the Cambridge Bitcoin Electricity Consumption Index.
One year post-Merge, Ethereum's new emissions have plummeted. The new PoS system consumes over 99.9% less energy than the old mining apparatus. Regardless of the success or failure of other aspects of the upgrade, it is now profoundly difficult to associate Ethereum with significant environmental impact.
Staking Distribution Raises Centralization Concerns
Beyond criticism for its high energy costs, Ethereum's old consensus model was also criticized for concentrating power among a small group of crypto mining firms that had the capital, specialized hardware, and expertise to build large-scale mining facilities. Before The Merge, just three mining pools dominated the majority of Ethereum's hash rate.
When Ethereum transitioned to PoS, it abandoned mining in favor of staking. This move eliminated the hardware requirements and computational costs of PoW, partly to enable broader participation in Ethereum network operations.
However, one year after The Merge, centralization remains one of Ethereum's most significant challenges. To stake on Ethereum, a validator is required to lock up 32 ETH—a value of approximately $50,000. These funds can earn steady interest but can also be "slashed," or revoked, if the validator acts dishonestly or makes a mistake. Setting up a validator node for staking is a complex task, and improper setup can lead to financial penalties.
Due to the cost and technical barriers of running a node, intermediary services have emerged. Centralized entities like Coinbase and "decentralized" projects like Lido allow users to pool their ETH together to meet the 32 ETH requirement for node creation. These intermediaries handle the heavy lifting: they take users' ETH, stake it on their behalf, and take a cut of the rewards earned from operating the validator.
Even before The Merge, some anti-PoS advocates worried that staking could increase Ethereum's centralization, meaning a small number of these intermediaries could gain disproportionate control over which blocks are added to the network.
This scenario appears to be unfolding. Currently, the largest staking provider is the decentralized staking pool Lido. Lido controls 32.3% of the total share of staked ETH. This figure is nearing a 33% threshold that developers warn could lead to security concerns if breached.
MEV and Censorship Challenges
Post-Merge, validators have unlocked substantial extra profits through a concept known as Maximal Extractable Value (MEV). Validators and block builders can strategically insert or reorder transactions before they are added to a block, effectively collecting extra fees from users.
When MEV unexpectedly became a vector for centralization and censorship on the network, third parties intervened to mitigate the issue.
Ethereum research and development company Flashbots invented MEV-Boost, software that validators can run to reduce the negative externalities of MEV. However, Flashbots' solution is controversial. While some believe MEV should be eradicated entirely, Flashbots' introduction of MEV-Boost has intensified centralization debates.
Today, approximately 90% of blocks on Ethereum are built using MEV-Boost, which optimizes how transactions are organized into blocks to maximize profit for validators.
The prevalence of MEV-Boost has become a focal point of network debate. As mentioned, MEV is viewed by some as an unfair tax on users. Flashbots' central role in Ethereum's MEV market has drawn criticism, as most blocks built through its software are "relayed," or passed to validators, by Flashbots itself.
This centralization is seen by some as a potential conduit for censorship. When the U.S. Treasury sanctioned certain Ethereum addresses associated with Tornado Cash, Flashbots stopped including those transactions in the blocks it relayed to validators. This move was met with opposition from Ethereum builders, who argue that the infrastructure layer Flashbots occupies should remain completely neutral to prevent the entire network from resembling a centralized payment processor like Visa.
Since The Merge, the Ethereum community has worked to reduce censorship by configuring MEV-Boost to use non-Flashbots relays. Currently, 17.3% of blocks rely on Flashbots relays for MEV extraction, and the censorship rate has dropped to 35%—a significant reversal from its peak of 78% in November 2022.
Liquid Staking Tokens Dominate the ETH Market
Following The Merge, liquid staking has risen to prominence within the Ethereum ecosystem.
Anyone can earn rewards and participate in securing Ethereum by staking, which involves locking ETH tokens in a blockchain address to earn interest. However, a key problem exists: once tokens are staked natively, they cannot be bought, sold, or used in DeFi (e.g., as loan collateral), limiting their appeal for investors seeking maximum flexibility.
Liquid staking services from third parties offer an alternative to native staking. Users who stake through services like Lido receive a derivative ETH token that represents their staked asset, rather than staking directly through the Ethereum protocol.
These Liquid Staking Tokens (LSTs) earn interest just like natively staked ETH, with the crucial difference that LSTs are tradeable. This makes them an highly attractive investment for DeFi traders who wish to participate in ETH staking. There are additional benefits: LSTs assume the staking risk for the user, who does not need to commit a full 32 ETH.
Before the Shapella upgrade in April 2023, stakers could not withdraw their staked ETH. Therefore, users initially turned to liquid staking to earn staking yields without committing to an indefinite lock-up period. Once staked ETH became withdrawable, a major risk was eliminated, theoretically reducing the value proposition of liquid staking. Some predicted the liquid staking market would shrink in favor of native staking, but the opposite has occurred.
The liquid staking market is now valued at nearly $20 billion and is growing rapidly. This is largely due to the ubiquity of LSTs in DeFi and their easier accessibility compared to native staking. Lido's token, stETH, holds the largest share of the LST market, at approximately 72.24%.
ETH Enters a Deflationary Era
The Merge introduced several changes to ETH's tokenomics.
Most notably, the upgrade pushed ETH into "deflation" for the first time, meaning the total supply of ETH is decreasing rather than increasing. The circulating supply of ETH today is 0.24% lower than it was one year ago. This supply reduction is partly due to EIP-1559, a network upgrade implemented about a year before The Merge. The EIP-1559 upgrade began "burning," or permanently removing, a portion of the ETH paid as transaction fees. However, ETH did not become net deflationary until The Merge further reduced the rate of new ETH issuance.
When ETH's supply was growing annually, some investors worried that their holdings would depreciate over time. Many hope deflation will help make ETH more valuable. So far, it is difficult to say if this has happened. In the months since The Merge, Ethereum's price has not changed dramatically, as short-term macroeconomic factors have likely exerted a stronger influence than supply changes.
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Frequently Asked Questions
What was the main goal of The Merge?
The primary goal was to transition Ethereum from an energy-intensive Proof-of-Work consensus mechanism to a more efficient Proof-of-Stake model. This drastically reduced energy consumption and set the stage for future scalability upgrades.
How does staking work on Ethereum?
Validators lock up 32 ETH to participate in securing the network. They are randomly selected to propose and attest to new blocks. In return, they receive rewards in ETH but risk having their stake slashed for malicious behavior.
What is a Liquid Staking Token (LST)?
An LST is a derivative token received when users stake their ETH through a liquid staking provider. It represents the staked ETH and accrued rewards, is tradeable, and can be used in other DeFi applications, providing liquidity instead of locking capital.
Why is centralization a concern in Ethereum staking?
The high cost and technical complexity of running a validator node have led to the rise of large staking providers. If one entity controls too much staked ETH (e.g., over 33%), it could theoretically compromise network security and neutrality.
What is MEV?
Maximal Extractable Value (MEV) is the profit that can be extracted by block producers through strategically including, excluding, or reordering transactions within a block. It has become a significant source of validator revenue post-Merge.
Is Ethereum's supply really deflationary?
Yes, since The Merge, the amount of ETH burned through EIP-1559 has often exceeded the new ETH issued as staking rewards, leading to a net decrease in the overall supply, making the asset deflationary.