Ethereum's Evolution: A Year since the Merge

On September 15, 2022, Ethereum experienced one of the most significant moments in its history. With the activation of the Merge, the network abandoned Proof of Work (PoW) mining and entrusted its operation to validators.

This implies that Ethereum now operates under the Proof of Stake (PoS) consensus. A group of validators is responsible for confirming transactions added to each new block in the chain. This essential change in Ethereum's consensus algorithm has brought consequences that, 12 months after the Merge, are already visible.

Circulating ETH 

The Merge significantly reduced block rewards for validators compared to what miners received before the Merge. In this context, 662,914 ETH have been emitted since the Merge. If this protocol change had not occurred, the emission would have exceeded 4.7 million ETH (the circulating supply would have increased by 3.16% in the year).

Details on ETH Supply After the Merge.

As mentioned, the fee burning also contributed, which is independent of the Merge and was implemented through EIP-1552. It involves the removal of a percentage of the fees paid by users to reduce the circulation of ETH. With this mechanism, the amount of ETH was reduced by 974,254 units.

Lastly, it's worth noting that the existence of 120 million ETH does not imply that all of them are readily available. As we will see later on, an increasingly significant percentage is locked in Ethereum's staking smart contract.

Validators

Validators are key components in a PoS (Proof of Stake) system. This is because they are responsible for validating the transactions included in each new block created on the network. To have this right, they must deposit 32 ETH into Ethereum's staking smart contract or be part of a staking pool.

At the time of writing this note, there are 791,142 active validators on Ethereum. At the time of the Merge, there were 438,076 validators. This difference implies approximately a 75% growth.

Growth in the number of Ethereum Validators, 1 year after the Merge.

As the number of validators increases, the ETH in the network's staking also grows. In this regard, validators have locked up 21% of the total circulating ETH in Ethereum's staking smart contract. This amounts to 25.2 million ETH.

Regarding earnings, it's detailed that validators currently receive a 3.2% annual yield on their ETH deposited in staking. Additionally, this can be supplemented with tips, at a rate of 1.2% annually, and earnings from MEV (Maximum Extractable Value) in case they use bots to extract this benefit.

Risks of Centralization in Ethereum

Now, during this time, significant warnings about the threat of centralization in Ethereum have also arisen. These warnings are based on the fact that two staking pools, Lido and RocketPool, used to concentrate a disproportionately large amount of ETH in staking. This makes the network less resistant to censorship, and anything that happens to any of these actors (outages, regulatory impositions, or arbitrary decisions) ends up having more influence on the network than it should.

However, the numbers have "adjusted" somewhat since January. As of the time of writing this note, Lido, Coinbase, RocketPool, and Binance collectively control less than 30% of the validators, in contrast to January when the percentage exceeded 50%.

Independent validators ("unknown") now outnumber the combined total of the major staking pools.

In addition to the warnings, there were certain events that prompted validators to exit pools, such as Lido's. Concerns have arisen about the liquidity of the synthetic token that backs users' deposits on this platform.

The Success of Shapella

The Shapella update was activated on Ethereum on April 12, 2023. This allowed validators to withdraw their staked funds. Far from promoting a mass exodus, as some had thought would happen, this new "freedom" motivated more validators to join the network.

According to Token Unlocks, since Shapella, Ethereum's staking increased by 7 million ETH. There were 11.4 million ETH deposited, while withdrawals reached 4.41 million ETH.

ETH Couldn't Withstand the Bear Market

On September 15, 2022, when the Merge was activated, ETH was trading at around USD 1,470. Interestingly, it experienced a significant drop from the previous days when it was at USD 1,750.

Highs and Lows in ETH Market Value since the Merge.

Over the past year, the cryptocurrency experienced significant ups and downs. It reached as low as USD 1,095 in November, during the bear market's minimum point following the FTX exchange's bankruptcy. However, it rebounded and reached USD 2,120 in April 2023.

In general terms, it can be said that ETH followed the trend of other cryptocurrencies in the market. They all tend to follow the path set by Bitcoin (BTC), which still, in September 2023, seems to remain tied to the bearish market sentiment that dominated much of the year.

Is Ethereum Better After the Merge?

In hindsight, it can be said that the Merge allowed Ethereum to take significant steps towards several pre-established goals. Firstly, the abandonment of mining has given this network a reputation for being more environmentally friendly, beyond any questions that may arise regarding PoW and its energy consumption. For Ethereum, this could lead regulators and businesses to view it more favorably.

Furthermore, the network made progress in its goal of becoming deflationary. The Merge was crucial for this because it reduced the daily coin emission and supported fee burning, which will gradually remove more and more ETH as more transactions occur.

Regarding the situation of validators, it seems to be heading in the right direction, despite initial doubts caused by high centralization. Today, validators joining in large numbers can even withdraw their ETH with complete freedom, marking another significant technical milestone in terms of technological development.

Some may wonder about the price. Well, the Merge never aimed to increase ETH's price or reduce network fees. These aspects depend on other factors not always related to the consensus algorithm, although it's clear that ETH's deflation could potentially impact the cryptocurrency's supply and market value in the future.