With The Merge approaching, we dive deep into Ethereum’s new proof-of-stake consensus metrics and examine the performance of the Beacon Chain since its inception.
The Ethereum Merge stands as one of the most impressive engineering feats in the cryptocurrency industry. This long-anticipated event marks the culmination of years of research, engineering, and development—transitioning the Ethereum blockchain from a proof-of-work to a proof-of-stake consensus mechanism.
In many ways, this transition can be compared to replacing the engine of a $200 billion jet mid-flight, while that jet is also carrying hundreds of billions of dollars in financial infrastructure.
The Merge is officially scheduled to occur at a terminal total difficulty of 58.75e21 and is expected to take place on September 15, 2022. With only days remaining, this report introduces a new set of metrics to help understand Ethereum’s proof-of-stake system and reviews the performance of the Beacon Chain since its genesis on December 1, 2020.
Block Production and Participation
The block production process on the Beacon Chain involves several additional steps compared to a proof-of-work chain. In a PoW system, miners construct blocks and broadcast winning blocks to a network of nodes, which then verify transactions and check whether the block template follows consensus rules.
In Ethereum’s PoS system, block proposal and validation follow these steps:
- The PoS blockchain is structured as a series of slots, each averaging 12 seconds in length. Each slot represents an opportunity for a validator to propose a block.
- Every consecutive group of 32 slots (6.4 minutes) is grouped into an epoch.
- The protocol selects a committee of 128 validators for each epoch.
- One validator from the committee is algorithmically chosen to propose a block in the upcoming slot.
- The remaining validators in the committee provide attestations, confirming that the proposed block and its transactions comply with consensus rules.
- The epoch is then finalized systematically by two-thirds of the validator network.
The Beacon Chain genesis block was launched on December 1, 2020. As of this writing, the network has been operational for 639 days (1.77 years). The chain tip has exceeded block height 4,557,056 and epoch height 142,408.
Each slot represents an opportunity to produce a block. If the validator chosen to propose a block is offline or fails to do so, the slot is considered missed. So far, 41,389 slots have been missed, accounting for only 0.908% of all slots.
In other cases, a block may be rejected by attesting validators or may result in a naturally occurring fork. These blocks are referred to as orphaned blocks and represent an alternate version of block history not followed by the majority of the network. To date, only 5,017 blocks have been orphaned on the Beacon Chain, accounting for just 0.110% of slots.
A reliable blockchain requires strong validator uptime, resulting in very few missed blocks. We can measure overall network performance using the participation rate, which is the ratio of successfully produced blocks to the total number of available slots.
The blue curve in the chart below shows the observed participation rate per epoch, generally remaining above 96%. The red curve displays the daily average participation rate, which has consistently reached over 99%, especially since the all-time high in market prices in November 2021. This indicates that validators on the Beacon Chain have been consistently online and producing blocks during their assigned slots.
We can also measure the total number of attestation votes made by validator committees on produced blocks. Each attestation serves as a "yes" vote for including the newly proposed block at the chain’s tip.
With an average slot interval of 12 seconds and 127 attesting validators, we can expect a stable daily attestation count between 783,000 and 914,000. Indeed, since August 2021, the total number of daily attestations has stabilized within this range, with approximately 800,000 attestation votes per day.
Validators Replace Miners
In Ethereum’s PoS consensus system, miners are replaced by validators, who must stake 32 ETH to participate in protocol consensus. The Ethereum Beacon Chain deposit contract was launched in early November 2020, allowing early adopters to deposit ETH and help bootstrap the Beacon Chain.
The first phase of the Beacon Chain roadmap was Phase 0. Before the genesis block could be created, the deposit contract required a minimum threshold of 524,288 ETH. It is important to note that deposits were—and still are—one-way transactions. ETH cannot be withdrawn from the deposit contract until the Shanghai upgrade, which is expected to occur within 6 to 18 months after The Merge.
Although deposits started slowly, the threshold for Phase 0 was convincingly reached on November 24, 2020, as community confidence grew rapidly in the week leading up to the planned genesis date.
Over the past 639 days, ETH deposits have continued flowing into the Beacon Chain contract as development progressed, staking infrastructure expanded, and community confidence strengthened. Since genesis, a steady baseline of approximately 200 to 250 deposits per day has been observed.
There have been four distinct periods of above-average deposit inflows, three of which occurred during the 2020–21 bull market, and the most recent between February and May 2022. Deposits have slowed since the collapse of the LUNA-UST project, which had a market-wide negative impact on token prices and confidence.
Investors have made over 418,527 deposits in total, each including the required 32 ETH stake to set up a validator. While this reflects the number of unique consensus-level validators, it is important to note that operators of these validator nodes can host, custody, and maintain multiple validators simultaneously. Therefore, this metric does not measure the number of unique validating entities.
Operators of liquid staking derivatives like Lido and RocketPool, centralized exchanges such as Coinbase, Binance, and Kraken, and even individual solo stakers are all capable of operating multiple validators at once.
The total amount of ETH staked on the Beacon Chain now exceeds 13.409 million ETH, accounting for 11.22% of the circulating supply. The Beacon Chain deposit contract is now one of the largest supply concentrations on the Ethereum network. Among all smart contracts holding 27.0% of the supply and centralized exchanges holding 16.8%, the total stake on the Beacon Chain represents a meaningful comparand to ETH.
The significant amount of ETH deposited into the Beacon Chain signals strong confidence in the success of The Merge among the Ethereum community and investors.
We can break down various staking pools to better categorize balances held by staking pools, exchange operators, and other unknown or individual stakers.
- Lido (red) is the largest entity in the staking network, operating validators with over 4.164 million ETH, accounting for 31.1% of the validator pool.
- The top three exchanges (orange), including Coinbase, Kraken, and Binance, collectively hold 3.565 million ETH, representing 26.6% of the validator pool.
- All other staking providers (purple) account for an additional 1.269 million ETH and 9.5% of the validator pool. If we combine all the above staking pool operators, they represent 8.998 million ETH in stake and operate 67.1% of the validator pool.
- Solo stakers and unknown operators (green) custody the remaining 4.411 million ETH, accounting for less than one-third (32.9%) of the validator pool.
The chart below shows this breakdown in relative terms. We can see how staking providers quickly dominated the validator pool, with Lido showing the most significant growth. This is likely due to a combination of factors, including but not limited to:
- The technical overhead required to operate a solo staking validator.
- The convenience and risk delegation offered by professional staking services.
- Investors with less than the required 32 ETH pooling their stakes.
- The ability to tokenize and trade staking derivatives or use them in DeFi protocols, as seen with Lido, RocketPool, and more recently, Coinbase with its cbETH product.
Interestingly, it appears that after the LUNA-UST collapse, the "Solo Staker and Unknown" cohort (green) slightly increased its dominance. The dominance of staking providers peaked at 69.5% and has since declined to 67.2%.
Although the Beacon Chain deposit contract is currently a one-way street, validators can still be removed from the staking pool through two mechanisms:
- Voluntary exit (blue), where a validator chooses to stop participating in consensus and enters the exit queue. These validators no longer propose or attest blocks, but their staked ETH cannot yet be withdrawn.
- Slashing, where the protocol forcefully ejects a validator from the pool due to malicious behavior, such as proposing or attesting invalid blocks or causing non-consensus chain splits.
So far, only 67 validators have voluntarily left the pool, and 167 slashing events have occurred. Further investigation is needed to determine whether these were engineering test cases during development or genuine malicious events.
Validator Performance and Earnings
Validators must first deposit 32 ETH to activate. If their balance falls below 16 ETH (due to inactivity leaks or slashing), they are ejected from the protocol. Once a validator enters the protocol, their total ETH balance begins to change due to several factors:
- Issuance and fee income (balance increases).
- Inactivity leaks if the validator frequently misses blocks or attestations (balance decreases).
- Slashing in cases of malicious behavior (balance decreases).
There is also a concept called effective balance, which is capped at 32 ETH and decreases in increments of 1 ETH (with a minimum buffer of 0.25 ETH). For example:
- If a staker has 32 ETH and earns a 0.5 ETH reward, their total balance (red) is 32.5 ETH, but their effective balance (green) remains 32 ETH.
- If a staker has 32 ETH but leaks 0.5 ETH due to an inactivity penalty, their total balance (red) becomes 31.5 ETH, and their effective balance (green) is rounded down to 31 ETH.
- A total balance of 31.250 ETH would have an effective balance of 31 ETH.
- A total balance of 31.249 ETH would have an effective balance of 30 ETH.
The chart below shows the total effective balance (green) actively participating in PoS consensus. The remaining total balance (red) is essentially excess ETH, which can be viewed as a buffer for inactive staking. Currently, the total effective balance is 13.357 million ETH, with approximately 745,000 ETH inactive (5.29% of the total).
We can calculate a new metric called Stake Effectiveness, which captures this balance as the ratio between effective and total staked ETH. With 5.29% of staked ETH inactive, stake effectiveness has declined from 100% at genesis to 94.7% today. This is largely due to rewards earned by validators pushing the average validator’s total balance above 32 ETH.
We can also examine the income earned by the aggregate validator pool so far. In Ethereum’s PoS consensus, the issuance rate depends partly on the amount of ETH staked—meaning the more ETH staked, the lower the rewards per validator.
This has indeed occurred: the annualized average ETH earnings have declined from 3.65 ETH/year at genesis to 1.42 ETH/year today. Given that the deposit contract is essentially one-way (and very few validators have left the pool), this reward dilution is almost entirely the result of the increase in staked ETH over the past 18 months.
The annualized yield for a 32 ETH deposit, denominated in ETH, has correspondingly fallen from over 15% at genesis to 4.44% today. After The Merge, investors will likely find comfort in a successful upgrade, though additional deposits may push yields even lower.
With both the PoS Beacon Chain and the existing PoW Ethereum chain operational, the total ETH issuance currently has two sources. Since the Beacon Chain genesis block, 747,000 ETH have been issued on the PoS chain, and 8.54 million ETH have been issued on the PoW chain. This translates to an issuance distribution of approximately 8% for PoS and 92% for PoW.
This also illustrates how the PoS chain is currently operating with a much lower issuance rate compared to the PoW chain.
We can also evaluate the realized price of Beacon Chain deposits and the impact of staking rewards on reducing the average cost basis. The realized price is calculated by multiplying deposited ETH by the spot price at the time of deposit and then averaging over the total staked ETH. This provides an estimate of the "average deposit price" for the validator pool.
- The realized price for the entire Ethereum market (purple) is $1,650, reflecting the average price at which the circulating ETH supply was last transacted.
- The realized price for all Beacon Chain deposits (red) is $2,470, which is 50% higher than the market average. This implies that staked tokens are experiencing 33% larger unrealized losses compared to the average ETH investor.
- The realized price for the Beacon Chain (including staking rewards) (blue dashed line) is $2,390, representing an average gain of 3.2% in the stakers’ cost basis—though still significantly higher than that of the average market participant.
This shows that although stakers have gained an average of 3.2% in ETH-denominated yield, the 2022 bear market has led to significant underperformance of the average deposit relative to the deposit price. It also highlights why liquid staking derivatives like Lido have gained such a large share of the staking market.
While issuance on the PoW chain has remained relatively stable at around 2 ETH per block (plus approximately 0.05 to 0.10 ETH in uncle rewards), issuance on the PoS chain has steadily increased as more validators enter the pool. Total daily PoS issuance has risen from about 340 ETH/day to the current 1,623 ETH/day.
If we compare the daily ratio of ETH issued via PoS to PoW, we can see that the proportion of ETH issuance attributable to the Beacon Chain has steadily risen. The PoS chain effectively increased the net ETH issuance by 2.8% at genesis to over 12.4% today.
Finally, we address one of the most significant questions post-Merge: what is the estimated impact of reduced PoS issuance and the EIP1559 burn mechanism on ETH net supply? The chart below shows two curves for daily ETH issuance since EIP1559 went live in August 2021:
- Current conditions (orange), where ETH issuance occurs on both PoW and PoS chains, and EIP1559 burning is active on the PoW side. With few exceptions, the ETH supply has been in a net inflationary state, with daily issuance fluctuating between 11,800 and 14,300 ETH since July.
- Simulated conditions (blue), where only the PoS Beacon Chain is active, and EIP1559 is on the PoS chain. This simulates what the market might have looked like if The Merge had been released alongside EIP1559. It shows a clearly net deflationary system until late July 2022, with issuance stabilizing around +500 to +1,000 ETH per day.
Given the current on-chain demand and particularly weak gas prices, this highlights that any meaningful recovery in gas fee pressure could reasonably be expected to make ETH a net deflationary supply asset.
👉 Explore more staking strategies
Frequently Asked Questions
What is the Beacon Chain?
The Beacon Chain is Ethereum's proof-of-stake blockchain, launched in December 2020. It introduced staking and consensus mechanisms that will replace proof-of-work after The Merge.
How does staking work on Ethereum?
To become a validator, users must deposit 32 ETH into the official staking contract. Validators are then responsible for proposing and attesting blocks, earning rewards for honest participation.
What happens to my staked ETH after The Merge?
Staked ETH and rewards remain locked until the Shanghai upgrade, expected 6–18 months post-Merge. After that, withdrawals will be enabled through a protocol update.
How are validators rewarded?
Validators earn rewards for producing blocks and making attestations. Penalties apply for being offline, and slashing occurs for malicious actions.
What is the participation rate?
The participation rate measures the percentage of blocks successfully produced relative to total slots. A high rate indicates a healthy and reliable network.
Will Ethereum become deflationary after The Merge?
Depending on network activity and gas fees, Ethereum may become net deflationary due to reduced issuance and continuous burning via EIP1559.
Conclusion
The Ethereum Merge is the culmination of years of dedicated work, exceptional engineering, and research effort. With all Ethereum testnets successfully merged in recent months, the mainnet merge is officially scheduled for September 15, 2022.
In this report, we explored the fundamental mechanics of Ethereum’s new proof-of-stake consensus mechanism and evaluated the network performance of the Beacon Chain. We assessed validator deposits, income streams, and the potential impact on net ETH supply dynamics.
With over 11.2% of the circulating ETH supply now participating in PoS consensus, the Beacon Chain represents a significant vote of confidence from the Ethereum community. A successful mainnet merge will pave the way for further analysis of this fascinating new consensus mechanism.