It has now been a full year since Ethereum completed The Merge, transitioning to a Proof-of-Stake (PoS) consensus mechanism. Over this period, Ethereum has not only demonstrated network reliability but also entered a new phase of economic and technological evolution. Key developments include ETH becoming a deflationary asset and significant growth in Layer 2 ecosystems, alongside increasing participation from institutional and corporate players.
Understanding Ethereum’s Deflationary Shift
The Merge fundamentally altered Ethereum’s issuance model. New ETH is now generated solely through staking in the PoS system, replacing the energy-intensive mining process of the previous Proof-of-Work (PoW) model.
Current estimates suggest that Ethereum’s PoS mechanism issues approximately 660,000 new ETH annually.
Data from ultrasound.money indicates that Ethereum’s circulating supply has decreased by over 300,000 ETH since The Merge, equivalent to around $500 million at current prices. Moreover, more than 3.58 million ETH have been permanently burned.
Source: ultrasound.money
Notably, Ethereum has entered a deflationary phase with an annualized deflation rate of -0.26%. In contrast, Bitcoin remains inflationary with an issuance rate of 1.716%.
Had Ethereum continued under the PoW model, its inflation rate would have been nearly double that of Bitcoin—around 3.162% annually.
This shift highlights the profound impact of PoS on Ethereum’s tokenomics, transforming ETH from an inflationary to a deflationary asset by reducing its supply over time.
These deflationary effects are occurring despite a recent decline in on-chain activity, which has reduced the daily burn rate to between 1,000 and 2,000 ETH. During periods of high network usage, the burn rate has historically reached 4,000–5,000 ETH per day, suggesting even stronger deflationary pressure could resume with increased adoption.
Additionally, ETH staking has grown consistently, now exceeding 24 million ETH—worth approximately $39.6 billion—accounting for nearly 20% of the total supply. This is a significant increase from the 13% staking rate observed one year ago, further enhancing ETH’s scarcity.
Compared to other major blockchain networks, where staking ratios often range between 60% and 80%, Ethereum’s staking participation still has considerable room for growth.
Layer 2 Solutions Reshaping the Ecosystem
Layer 2 networks have emerged as a dominant force within the Ethereum ecosystem, driving scalability and reducing transaction costs. The total value locked (TVL) in L2 solutions is nearing an all-time high of approximately $10 billion.
Source: L2BEAT
Innovations such as OP Stack, Arbitrum Orbit, and ZK Stack are accelerating the development of modular rollups. These technologies, combined with Ethereum’s first-mover advantage and EVM compatibility, are challenging the narratives of competing Layer 1 blockchains.
In the past, developers faced a relatively straightforward choice when selecting a blockchain: Ethereum, Solana, Cosmos, or another Layer 1. Rollups were not yet operational, and the concept of modular stacks was unfamiliar. Differences between L1s—such as throughput and fees—were clear and easy to compare.
Today, the maturity of Layer 2 solutions offers developers a broader range of options, effectively compressing the market space for alternative L1 networks.
The upcoming Dencun upgrade is expected to further reduce Layer 2 transaction costs by an order of magnitude, enabling new use cases and richer on-chain experiences.
High gas fees on Ethereum mainnet—often ranging from $1 to $20 per transaction—have historically limited practical usability for average users. Complex applications, such as derivatives platforms, became prohibitively expensive due to frequent contract interactions.
Layer 2 solutions mitigate these costs, making advanced dApps accessible to a broader audience.
The rise of platforms like Mirror has demonstrated the potential of high-performance chains in supporting synthetic assets and financial instruments. With L2 networks reducing fees, derivative applications and other high-frequency dApps are poised for expansion.
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New Developments and Institutional Adoption
Beyond technical upgrades, Ethereum has also attracted attention from traditional finance and technology sectors. PayPal’s launch of PYUSD, a dollar-denominated stablecoin on Ethereum, is one such milestone.
As a widely recognized payment giant, PayPal’s entry into the stablecoin market introduces both liquidity and regulatory scrutiny—reminiscent of Facebook’s earlier Libra project.
Overall, PYUSD’s deployment on Ethereum reinforces the network’s role as a global settlement layer and signals growing institutional confidence.
At the time of writing, PYUSD has been listed on major platforms including Coinbase and Kraken. However, its circulation remains modest at 44.37 million tokens, with only 452 holding addresses. Whether it can challenge Tether’s dominance or capture significant market share remains to be seen.
On the regulatory front, the U.S. Securities and Exchange Commission (SEC) is reportedly preparing to approve Ethereum futures ETFs. Nearly a dozen firms—including Volatility Shares, Bitwise, and ProShares—have filed applications.
The approval of futures ETFs before spot ETFs indicates growing acceptance of Ethereum within traditional finance. This pattern mirrors the regulatory approach to Bitcoin, where futures-based ETFs received approval ahead of spot products.
Vitalik Buterin has emphasized that the next decade is critical for blockchain technology. Applications must demonstrate utility rather than merely promise future value.
“Due to scaling issues, many applications seem promising in theory but are not yet practical. If they remain non-viable even after scaling improvements, it may indicate that blockchain was unnecessary for those use cases.”
One year after The Merge, with Layer 2 solutions maturing and institutional interest growing, Ethereum appears well-positioned for continued innovation and adoption.
Frequently Asked Questions
What changed after Ethereum’s Merge?
Ethereum transitioned from Proof-of-Work to Proof-of-Stake, reducing energy consumption and altering ETH issuance. The network became deflationary as burning mechanisms now exceed new ETH issuance.
How does Layer 2 improve Ethereum?
Layer 2 networks process transactions off-chain before settling on Ethereum, reducing fees and increasing throughput. This enables more scalable applications and better user experiences.
What is the significance of ETH becoming deflationary?
A deflationary supply means that ETH becomes scarcer over time, potentially increasing its value if demand remains constant or grows. This contrasts with inflationary assets that lose value as supply expands.
Can Layer 2 solutions replace other blockchains?
While not a direct replacement, L2s offer similar scalability benefits as alternative L1s while maintaining Ethereum’s security and composability. This makes them competitive for developers and users.
What role do institutions play in Ethereum’s growth?
Institutional participation—through staking, ETFs, or stablecoins—adds liquidity, legitimacy, and regulatory clarity. It also introduces traditional finance users to Ethereum’s capabilities.
How does staking contribute to network security?
Stakers lock ETH to validate transactions and create new blocks. In return, they earn rewards. This mechanism secures the network and aligns stakeholders with its long-term health.