One year after its historic transition to proof of stake, Ethereum has seen a massive reduction in energy use and a marked improvement in access to the network, however, a number of technical issues still mark the road ahead.
The Merge, which took place on Sept. 15, 2022, saw the Ethereum mainnet merging with the Beacon Chain, a separate proof-of-stake blockchain. This shift from an energy-guzzling proof-of-work (PoW) consensus mechanism to PoS has resulted in a drastic reduction in the total power consumption of the Ethereum network.
Data from The Cambridge Centre for Alternative Finance shows that the energy use of the Ethereum network has dropped more than 99.9% from the approximately 21 terawatt hours of electricity it used while running under PoW.
The Merge has enabled the Ethereum network to become an integral part of Web 3.0, a term coined to refer to the next generation of the internet, which is driven by decentralization, tokenization, and the use of new technologies such as artificial intelligence and the Internet of Things.
The merge has also allowed for increased access to the Ethereum network, with the introduction of new features such as sharding, which allows for the network’s resources to be divided into smaller pieces and distributed across multiple nodes.
Ethereum turns deflationary
The Merge also saw a decrease in the amount of Ether (ETH) issued to secure the Ethereum network, making it economically deflationary. According to data from ultrasound.money, since The Merge, around 300,000 ETH (worth $488 million at current prices) has been burned, reducing the total supply of ETH by 0.25% on an annual basis.
Although many expected a dramatic rise in ETH prices due to the deflationary pressure, the banking crisis and spiking inflation had a negative impact on its growth. In comparison, the price of Bitcoin (BTC) in the first quarter of this year increased significantly, likely due to the traditional financial instability caused by the banking crisis.
The introduction of stakers instead of miners was the main idea behind the proof-of-stake upgrade. The Shapella upgrade in April 2023 led to a huge increase in ETH staking, with liquid staking providers such as Lido and Rocket Pool being the main beneficiaries.
Liquid staking takes over
Since the Merge, liquid staking has become a major force in the Ethereum sphere, with more than $19.5 billion worth of ETH currently staked through liquid staking protocols, according to data from DeFiLlama.
At the time of writing, Lido is the clear leader in staking ETH, accounting for 72% of all staked ETH.
Many Ethereum proponents, including Labry CEO Lachlan Feeny, have praised staking for removing the need for expensive, sophisticated mining hardware. However, one of the primary worries with the rise of liquid staking is the level of control granted to staking providers, especially Lido Finance.
“Liquid staking is ultimately good for the network as it ensures that the governance of the network is not restricted only to the wealthy. Nevertheless, it has also brought its own issues,” Feeny told Cointelegraph.
At least five Ethereum liquid staking providers are attempting to impose a 22% limit rule, in a bid to keep the Ethereum network decentralized — though Lido voted not to take part.
Notably, Lido voted by a 99.81% majority not to self-limit back in June, prompting Ethereum advocate Superphiz to state that the the staking providers had “expressed an intention to control the majority of validators on the beacon chain.”
This move has caused widespread concerns about the potential centralization of validation on Ethereum.
“Lido currently controls 32.26% of all staked Ether on the network worth over $14 billion. In the long run I am confident that Ethereum is better off with liquid staking than without it, yet there are still many challenges that need to be addressed,” Feeny concluded.
Feeny also noted that the most pressing concern for Ethereum in the near future was the growing regulatory pressure against crypto and blockchain in the US.
“Regulatory bodies, particularly in the US, seem to be determined to eliminate the US-based blockchain industry,” he said.
Apart from staking, client diversity is also a major issue. On Sept. 5, Vitalik Buterin took to the stage at Korea Blockchain Week to discuss the six key problems that must be solved to tackle the problem of centralization.
At present, the majority of the 5,901 active Ethereum nodes are being run through centralized web providers like Amazon Web Services, which many experts claim leaves the Ethereum blockchain vulnerable to a centralized point of failure.
In Buterin’s view, for Ethereum to remain sufficiently decentralized in the long-term it must be easier for everyday people to run nodes, which means drastically reducing costs and hardware requirements for node operators.
Buterin’s main solution was the concept of statelessness, which eliminates the reliance on centralized servers by cutting data requirements for node operators to near-zero.
Although this was Buterin’s most important concern for the centralization issue, he explained that these problems may not be resolved for another 10 to 20 years.
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