One year after Ethereum’s historic transition known as The Merge, the blockchain has successfully transformed into a more sustainable and economically efficient network. Completed on September 15, 2022, this pivotal upgrade shifted Ethereum from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism—ending over seven years of energy-intensive mining and ushering in a new era of environmental responsibility and monetary deflation.
Today, Ethereum stands as a testament to what’s possible when innovation meets sustainability. Yet, despite these achievements, emerging challenges—particularly around staking centralization and validator concentration—are raising important questions about long-term decentralization and network security.
Dramatic Drop in Energy Consumption
One of the most celebrated outcomes of The Merge is Ethereum’s drastic reduction in energy usage. According to data from the Cambridge Centre for Alternative Finance (CCAF), Ethereum’s energy consumption dropped by 99.99% post-Merge—making it tens of thousands of times more efficient than Bitcoin’s PoW network.
To put this into perspective:
- Bitcoin operates at an energy scale comparable to the Merdeka 118, the world’s second-tallest building at 679 meters.
- Pre-Merge Ethereum was similar in consumption to the London Eye, standing 135 meters tall.
- Post-Merge Ethereum now uses roughly the same energy as a raspberry, measuring just 1.5 centimeters.
This staggering improvement has been widely recognized, including by Ethereum co-founder Vitalik Buterin, who has repeatedly highlighted the environmental benefits of PoS. With climate impact becoming a key concern for tech ecosystems, Ethereum’s green transition strengthens its position as a responsible foundation for Web3 innovation.
Ethereum Enters Deflationary Territory
Another major milestone: Ethereum has become deflationary—meaning more ETH is being burned than issued.
Data from Ultrasound.money shows that since The Merge:
- 680,000 ETH were newly issued
- 980,000 ETH were burned through transaction fees (worth ~$1.595 billion)
- Resulting in an annual inflation rate of -0.249%
This deflationary trend stems from EIP-1559, which burns base fees from every transaction. When network activity is high, the burn rate can exceed issuance rewards, leading to net supply contraction.
However, during periods of low activity—like the recent market downturn—Ethereum briefly reverted to mild inflation (+0.028% over the past 30 days). This highlights a crucial truth: while deflation is possible, it’s not guaranteed. It depends on sustained demand and usage across DeFi, NFTs, and Layer 2 ecosystems.
Still, the ability to achieve deflation at all marks a structural shift in Ethereum’s economic model—one that could enhance scarcity and long-term value accrual.
ETH Underperforms BTC Despite Fundamentals
Despite these positive developments, Ethereum’s price performance over the past year has lagged behind Bitcoin.
In the lead-up to The Merge, many analysts predicted a “triple halving” effect—analogous to Bitcoin’s supply shocks—that would drive strong price appreciation. However, ETH/BTC has declined by approximately 25% since the upgrade, according to TradingView data.
Several factors may explain this:
- Bitcoin continues to dominate as a macro-focused "digital gold" narrative
- Regulatory uncertainty around ETH’s status as a security
- Slower retail momentum compared to previous bull cycles
Yet, Ethereum’s fundamentals remain robust. Its shift to PoS has improved scalability readiness, reduced environmental criticism, and laid the groundwork for future upgrades like Dencun and EIP-4844 (proto-danksharding), which aim to slash Layer 2 transaction costs.
👉 Learn how upcoming Ethereum upgrades could reignite investor interest and reshape DeFi.
Emerging Risks: Staking Centralization and Over-Collateralization
While The Merge succeeded technically, new risks are emerging—particularly around staking distribution and network resilience.
Lido Dominates Liquid Staking Market
Lido Finance controls 72.26% of all liquid staking on Ethereum, according to DeFiLlama. When including individual stakers and other providers, Lido still accounts for about 32% of total staked ETH.
This level of concentration raises concerns about decentralization. If a single protocol or entity gains outsized influence over validation, it could undermine trustless consensus—especially during contentious forks or governance votes.
Discussions continue within the community about whether dominant protocols should self-impose validator limits to preserve network health.
Rising Staking Rates Could Trigger Systemic Risk
Ethereum developer Tim Beiko recently summarized core developer discussions pointing toward potential changes via EIP-7514, which would limit daily validator churn (the rate at which new validators can join).
Why? Because staking deposits have grown steadily since The Merge. Dankrad Feist, a researcher at the Ethereum Foundation, projects:
- May 2024: 50% of total ETH supply staked
- September 2024: 75% staked
- December 2024: Potentially 100% staked
If nearly all ETH becomes locked in staking contracts, liquidity dries up, market dynamics distort, and the risk of coordinated control increases.
Moreover, if too many users chase diminishing staking yields—even near zero—it could create perverse incentives that threaten network security rather than strengthen it.
What Happens If Staked ETH Surpasses Unstaked Supply?
A scenario where liquid staked ETH (stETH) exceeds the value of unstaked ETH introduces uncharted economic territory. Possible outcomes include:
- Collapse of staking rewards due to oversupply
- Reduced incentive for node operators
- Increased reliance on centralized liquid staking providers
- Greater vulnerability to governance attacks
Solutions under consideration include:
- Raising the 32 ETH staking cap per validator
- Exploring re-staking protocols (e.g., EigenLayer)
- Addressing technical bottlenecks in validator onboarding
- Implementing MEV burn mechanisms to reduce yield chasing
- Supporting alternative liquid staking protocols to break Lido’s dominance
These steps are critical to maintaining a healthy balance between participation and decentralization.
Frequently Asked Questions (FAQ)
Q: Did Ethereum really reduce energy use by 99%?
A: Yes. Independent analyses, including from the Cambridge Centre for Alternative Finance, confirm Ethereum’s energy consumption dropped by 99.99% after transitioning to proof-of-stake.
Q: Is Ethereum truly deflationary now?
A: It can be. When transaction demand is high, more ETH is burned than issued via EIP-1559—leading to deflation. However, during low-usage periods, inflation may return temporarily.
Q: Why did ETH underperform BTC after The Merge?
A: Despite strong fundamentals, ETH faced macro headwinds, regulatory scrutiny, and weaker investor sentiment compared to Bitcoin’s “safe haven” narrative in uncertain markets.
Q: Is Lido Finance too powerful in Ethereum’s staking ecosystem?
A: Many developers and researchers believe so. With over 70% share of liquid staking, Lido poses centralization risks that could impact network security and governance fairness.
Q: Could everyone staking ETH break the system?
A: If nearly all ETH is staked, liquidity dries up and economic imbalances emerge. This could reduce market efficiency and increase systemic risk—prompting calls for policy or protocol-level interventions.
Q: What’s being done to prevent staking centralization?
A: Proposals include limiting validator intake (EIP-7514), promoting alternative liquid staking platforms, exploring MEV burn mechanisms, and improving scalability via Dencun and sharding.
Conclusion
One year after The Merge, Ethereum has proven its ability to innovate at scale—achieving dramatic energy savings and introducing deflationary mechanics. These are monumental wins for both technology and sustainability.
Yet, the journey isn’t over. As staking grows and centralization risks mount, the community must act decisively to preserve decentralization—the core ethos of blockchain.
The path forward requires balancing accessibility with resilience, innovation with caution. With upcoming upgrades poised to enhance scalability and security, Ethereum remains at the forefront of decentralized evolution—but only if it stays true to its founding principles.
Core Keywords: Ethereum Merge, proof-of-stake, ETH deflation, energy consumption reduction, liquid staking, Lido Finance, staking centralization, EIP-7514