Did Ethereum’s merge raise *Bitcoin*’s value? All the numbers

As the world of cryptocurrencies burgeons, Ethereum stands out as a leading player, particularly after its recent transformative decision. A year post-Merge: What’s changed? 

Just over twelve months ago, Ethereum made headlines with its decision to transition from the energy-consuming proof-of-work (PoW) mechanism, commonly associated with Bitcoin, to the more energy-efficient proof-of-stake (PoS) method. This move, known as the Merge, shifted the blockchain landscape significantly.

Redefining Energy Consumption

The primary motive behind the Merge was to reduce Ethereum’s extensive energy footprint. In the world of blockchains, Ethereum’s pre-Merge energy consumption was comparable to that of a small nation, drawing criticism, especially in the context of early Non-Fungible Tokens (NFTs) and decentralized finance (DeFi) projects. Bitcoin, for its part, continues its PoW system, consuming energy on par with nations like Singapore.

The transition from mining to staking was anticipated to curtail Ethereum’s energy expenditure significantly. And it did. A year after the Merge, Ethereum’s proof-of-stake model has realized a reduction in energy consumption by an astounding 99.9%. This monumental decline has largely silenced critics who once labeled Ethereum as environmentally detrimental.

Centralization Concerns Persist

The Merge was also seen as a means to decentralize the Ethereum network further. Earlier, a handful of powerful crypto mining conglomerates controlled the majority of the network’s operations. With Ethereum’s shift to PoS, staking replaced mining, eliminating the need for intensive computational efforts. This change was expected to democratize network operations, allowing a broader set of participants.

However, a significant barrier remains: to stake on Ethereum, an individual must deposit 32 ETH, equivalent to around $50,000, which also carries a potential risk of forfeiture under certain conditions. The considerable amount combined with the technical intricacies of establishing a validator node has led to the rise of intermediary entities, both centralized like Coinbase and decentralized like Lido, that facilitate staking on behalf of users, for a share in the returns.

Such developments have rekindled fears of centralization. For instance, Lido, the dominant decentralized staking pool, is inching towards a third of the total staked ETH. This concentration nears a technical threshold that could, in theory, introduce security vulnerabilities.

The MEV Conundrum

Following the Merge, Ethereum’s validators discovered a lucrative, albeit contentious, revenue stream known as maximal extractable value (MEV). This strategy allows validators to increase their profits by strategically positioning transactions. While MEV can be viewed as an “invisible tax” extracted from users, third-party interventions have aimed to address its negative repercussions.

A firm named Flashbots introduced MEV-Boost, software designed to optimize MEV benefits. Currently, a majority of Ethereum’s blocks use MEV-Boost, leading to concerns about its centralized role in the MEV ecosystem. The rising dominance of Flashbots in the MEV arena underscores the lingering challenges of centralization and potential network censorship, issues that Ethereum purists argue should be absent from foundational layers of the blockchain.

Liquid Staking’s Ascent

Another intriguing development post-Merge is the rise of liquid staking. Ethereum’s staking mechanism, while lucrative, comes with a caveat: once tokens are staked, they become illiquid, preventing them from being utilized in decentralized finance activities. Third-party services introduced a solution: liquid staking tokens (LSTs) that represent staked ETH but remain liquid, allowing them to be traded freely.

Such LSTs have gained traction, especially as they offer users the advantages of staking without the need for a 32 ETH minimum. Despite initial concerns that the LST market might shrink post the Shapella upgrade, which enabled the withdrawal of staked ETH, the market has continued its upward trajectory, driven by DeFi’s adoption and LSTs’ inherent flexibility.

Road Ahead

Ethereum’s Merge came with nuanced changes to the blockchain’s tokenomics. Notably, Ethereum transitioned to a deflationary model, ensuring the total ETH supply decreases over time. This transformation was propelled by a combination of the EIP-1559 upgrade, which introduced the burning of some ETH with each transaction, and the Merge’s modifications to ETH issuance rates.

Investors, who once worried about a perpetual increase in ETH supply diluting their holdings, now observe a shrinking supply. Whether this deflationary model impacts Ethereum’s valuation significantly remains a topic of debate.

In conclusion, Ethereum’s journey post-Merge has been punctuated with both commendable advancements and lingering challenges. As the crypto ecosystem continually evolves, one can’t help but wonder: What will Ethereum’s next transformational step be?