One year after the Ethereum merger: Energy consumption has dropped by 99%, but centralization issues linger

Blockchain September 16 On September 15, 2022, Ethereum executed a merge-the Ethereum mainnet merged with the beacon chain, making a historic shift to proof of stake. A year later, Ethereum's energy usage has been greatly reduced and network access has improved significantly. However, many technical problems still exist.

The most significant improvement of Ethereum after the merger is the transition from the energy-consuming Proof of Work (PoW) consensus mechanism to the Proof of Stake (PoS) consensus mechanism, which has significantly reduced the total power consumption of the Ethereum network. According to the Cambridge Center for Alternative Finance, the energy consumption of the Ethereum network has dropped by more than 99.9% compared to the approximately 21 terawatt-hours of electricity used when PoW was running.

Ethereum is in deflation

In addition to using less electricity, the merger has caused the Ethereum network to become economically deflationary, meaning that the amount of ETH removed from the supply has exceeded the amount of new ETH minted to secure the Ethereum network.

According to Ethereum data provider Ultrasound.money, just over 300,000 ETH (worth $488 million at current prices) has been burned since the merger. At the current rate of destruction, the total supply of ETH is decreasing by 0.25% per year.

While many supporters believe that Ethereum’s price will surge due to renewed deflationary pressures, hopes for a significant rise in Ethereum’s price have been hit by a series of macroeconomic headwinds, including a banking crisis and surging inflation.

Notably, ETH’s growth pales in comparison to Bitcoin’s price growth, which in the first quarter of this year appeared to benefit from the traditional financial instability brought on by the banking crisis. Price action aside, the central theme of the Proof of Stake upgrade was the introduction of stakers to replace miners to secure the network. The subsequent Shapella upgrade in April 2023 drove a massive shift in ETH towards staking. The biggest beneficiaries of this shift were liquidity staking providers such as Lido and Rocket Pool.

The rise of liquidity staking

Since the merger, liquidity staking providers have dominated the Ethereum space, with over $19.5 billion worth of ETH currently staked through liquidity staking protocols, according to DefiLlama. As of the time of publishing, Lido is by far the largest staking provider, accounting for 72% of all staked ETH.

However, while many Ethereum advocates, including Labry CEO Lachlan Feeny, have praised the move to staking for removing the hurdle of expensive, complex mining hardware, one of the main concerns raised by the rise of liquid staking is the degree of control that staking service providers, particularly Lido Finance, grant to miners. Lachlan Feeny explained: "Liquidity staking is ultimately good for the network because it ensures that the governance of the network is not limited to the wealthy. However, this also leads to its own problems."

As of now, at least five Ethereum liquid staking providers are working to implement a 22% staking limit rule to ensure that the Ethereum network remains decentralized - but Lido is not participating. Notably, Lido voted in June with a 99.81% majority to not impose a self-limit, leading Ethereum advocate Superphiz to announce that the staking provider "expressed its intention to control a majority of validators on the beacon chain." The move sparked widespread concerns that Ethereum validation was too centralized.

Lachlan Feeny added: “Lido currently controls 32.26% of all staked ether on the network, valued at over $14 billion. In the long run, I believe Ethereum is better off with liquid staking than without it; however, there are still many challenges to overcome.”

In addition to staking, customer diversity also remains a core issue. On September 5, Vitalik Buterin took the stage at the Korea Blockchain Week to discuss six key issues that need to be addressed to solve the centralization problem. Currently, most of the 5,901 active Ethereum nodes are run through centralized network providers such as Amazon Web Services, and many experts claim that this makes the Ethereum blockchain face centralized failure points.

Vitalik Buterin believes that in order for Ethereum to remain sufficiently decentralized in the long run, it needs to be easier for ordinary people to run nodes, which means significantly reducing the costs and hardware requirements for node operators. The main solution he gave is the concept of statelessness, which eliminates dependence on centralized servers by reducing the data requirements of node operators to near zero.

Vitalik Buterin said: “Today, running a node requires hundreds of GB of data. With a stateless client, you can run a node for essentially zero.”

Although this is Vitalik Buterin’s most prominent concern about centralization, he explained that these problems may not be solved for another 10 to 20 years. For Ethereum, which has just been merged for a year, perhaps only time can give us the answer.

Part of this article is compiled from Cointelgraph