One year has passed since Ethereum’s historic transition to proof of stake (PoS), and the results are impressive and indicative of the challenges ahead. The Merge, which took place on September 15, 2022, marked the fusion of Ethereum’s mainnet with the Beacon Chain, a separate PoS blockchain. The most noticeable change post-merge was the substantial reduction in energy consumption.
According to data from The Cambridge Center for Alternative Finance, Ethereum’s shift from energy-intensive proof-of-work (PoW) to PoS has led to a remarkable 99.9% drop in energy usage. This transition benefits the environment and positions Ethereum as a sustainable blockchain platform.
Moreover, Ethereum has become economically deflationary post-Merge. Over 300,000 ETH (worth $488 million) has been burned since the transition, reducing the total supply by 0.25% per year. Despite expectations of a significant price surge due to this deflationary pressure, external factors like the banking crisis and inflation have impacted Ethereum’s growth, causing it to lag behind Bitcoin regarding price appreciation.
The central focus of the PoS upgrade was the introduction of stakers to replace miners in securing the network. The subsequent Shapella upgrade in April 2023 spurred a massive shift toward staking, benefiting liquid staking providers like Lido and Rocket Pool.
Liquid staking has gained dominance in the Ethereum ecosystem, with over $19.5 billion worth of ETH staked through liquid staking protocols, according to DeFiLlama. Currently, Lido accounts for 72% of all staked ETH. However, concerns have arisen regarding the control wielded by staking providers like Lido.
Despite its benefits, liquid staking introduces governance challenges. Several Ethereum liquid staking providers are advocating for a 22% limit rule to maintain network decentralization, while Lido Finance voted against it, sparking concerns of potential centralization.
Lido controls over 32% of all staked Ether on the network, valued at over $14 billion. While liquid staking is beneficial in the long run, it presents hurdles that need addressing.
Another pressing concern for Ethereum is increasing regulatory pressure, particularly in the United States. Regulatory bodies’ scrutiny threatens the U.S.-based blockchain industry, posing potential challenges for Ethereum and the global blockchain community.
Beyond staking and regulation, client diversity remains a central issue. Vitalik Buterin, Ethereum’s co-founder, highlighted the need for greater decentralization by making it easier for everyday individuals to run nodes. Most active Ethereum nodes are hosted by centralized web providers, posing a centralization risk.
Buterin’s solution is the concept of statelessness, reducing data requirements for node operators to near zero and making it more accessible for anyone to run a node. However, these issues may take a decade or more to address fully.
As Ethereum continues its journey in blockchain technology, it faces remarkable achievements and formidable challenges that will shape its future. The transition to PoS has brought sustainability and efficiency, but ongoing hurdles, from governance concerns to regulatory pressures, must be navigated to ensure Ethereum’s continued success.