The Ethereum Merge, a landmark upgrade that transitioned the network from Proof-of-Work (PoW) to Proof-of-Stake (PoS), occurred over a year ago. While it successfully reduced energy consumption by an estimated 99.9%, it also brought longstanding concerns around centralization into sharper focus. This analysis explores the five most significant outcomes and ongoing challenges one year post-Merge.
A Drastic Reduction in Energy Consumption
The primary goal of the Merge was to overhaul Ethereum’s consensus mechanism. The old energy-intensive PoW system, which relied on miners solving complex cryptographic puzzles, was completely replaced.
Prior to the upgrade, Ethereum's energy footprint was comparable to that of a small country, a major point of criticism for the network. Post-Merge, the new PoS system consumes over 99.9% less energy. This monumental shift has effectively eliminated the environmental concerns that once dominated discussions about Ethereum’s sustainability, a clear and undeniable success.
Persistent Centralization Concerns in Staking
A key promise of the move to PoS was to democratize network participation by removing the need for expensive, specialized mining hardware. Instead, participants can become validators by staking 32 ETH.
However, the high capital requirement—32 ETH represents a significant financial barrier—and the technical complexity of running a validator node have led to the rise of intermediaries. Staking services, from centralized entities like Coinbase to decentralized collectives like Lido, allow users to pool their ETH to meet the 32 ETH threshold. These services operate the nodes on users' behalf, taking a cut of the staking rewards.
This has, ironically, led to new centralization risks. Lido, the largest decentralized staking pool, currently controls about 32.3% of all staked ETH. The community is watching this figure closely, as surpassing a 33% share could potentially threaten the network's security and neutrality.
The Double-Edged Sword of MEV and Censorship
Post-Merge, validators gained access to a new revenue stream known as Maximal Extractable Value (MEV). This involves reordering or inserting transactions within a block to maximize profits, a practice that can lead to user exploitation and network inefficiency.
To mitigate MEV's negative externalities, the research firm Flashbots developed MEV-Boost, software that helps validators capture MEV more efficiently. However, its adoption introduced new concerns. At one point, nearly 90% of blocks were built using MEV-Boost, and a majority of those were relayed through Flashbots' own infrastructure.
This concentration of power manifested as a potential censorship vector when Flashbots began censoring transactions linked to OFAC-sanctioned addresses. This sparked significant debate within the community about the need for neutral infrastructure. Since then, efforts to diversify relay options have been successful, with the censorship rate dropping substantially from its peak of 78% in late 2022 to around 35% today.
The Dominant Rise of Liquid Staking Tokens (LSTs)
The Merge cemented the importance of staking in the Ethereum ecosystem. A subsequent innovation, liquid staking, has since exploded in popularity. Traditional staking locks up ETH, making it illiquid and unusable in Decentralized Finance (DeFi). Liquid staking protocols solved this problem.
Services like Lido allow users to stake their ETH and receive a liquid staking token (LST)—like stETH—in return. These LSTs accrue staking rewards and remain fungible, meaning they can be traded, sold, or used as collateral across the DeFi ecosystem. This provides stakers with liquidity and flexibility without requiring a 32 ETH commitment.
Despite the Shapella upgrade enabling withdrawals in April 2023, which reduced the risk of traditional staking, the liquid staking market has continued to grow rapidly. It is now a nearly $20 billion industry, with Lido’s stETH commanding a dominant market share of over 72%.
ETH's Shift Toward a Deflationary Model
The Merge had a profound impact on Ethereum’s token economics. Coupled with the earlier EIP-1559 upgrade, which burns a portion of transaction fees, the reduction in new ETH issuance post-Merge pushed the network into a deflationary state.
This means the net supply of ETH is now decreasing rather than increasing, with the circulating supply down 0.24% one year later. In theory, a reducing supply should create upward pressure on price. However, the price of ETH has remained relatively stable post-Merge, suggesting that broader macroeconomic factors and market sentiment have a more immediate impact on price than the deflationary mechanism alone.
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Frequently Asked Questions
What was the main purpose of the Ethereum Merge?
The primary purpose was to transition Ethereum from a Proof-of-Work (PoW) consensus mechanism to a Proof-of-Stake (PoS) system. This was done to drastically reduce the network's energy consumption by over 99.9% and to set the stage for future scalability upgrades.
Did the Merge make Ethereum more decentralized?
Not entirely. While it removed the need for centralized mining farms, it introduced new centralization risks in staking. High capital requirements have led to the dominance of a few large staking pools, like Lido, raising concerns about the concentration of power among a small number of entities.
What is MEV and why is it a problem?
Maximal Extractable Value (MEV) is the profit validators can make by reordering or inserting transactions in a block. It's a problem because it can lead to a worse experience for regular users through front-running and higher fees, and its extraction can be controlled by centralized entities, posing a censorship risk.
What are liquid staking tokens (LSTs)?
LSTs are derivative tokens received when you stake ETH through a liquid staking protocol. They represent your staked ETH and the rewards it accrues. Their key advantage is that they are liquid and can be used in other DeFi applications while still earning staking yields.
Is Ethereum deflationary now?
Yes, thanks to the combination of the EIP-1559 fee burn mechanism and the reduced ETH issuance rate after the Merge, the net supply of ETH has been decreasing, making it a deflationary asset.
How can I participate in Ethereum staking safely?
You can run your own validator node if you have 32 ETH and the technical expertise. For most users, using a reputable staking provider is the best option. It's crucial to research providers, understand the risks of liquid staking tokens, and diversify to mitigate centralization risks. 👉 Learn more about secure staking strategies