In the ever-changing world of cryptocurrencies, milestones are marked not only by the value of digital assets, but also by transformative shifts that redefine the underlying technology.

Among these transformative moments in Ethereum , the “Merger” is an important turning point.

The merger, which took place on September 15, 2022, was not just another Ethereum upgrade; it was a seismic shift. This marked the culmination of Ethereum’s transition from the energy-intensive Proof of Work (PoW) consensus mechanism to the more sustainable and environmentally friendly Proof of Stake (PoS) system. This transition was not just a technical upgrade; it was a profound rethinking of how Ethereum works, with far-reaching implications for its supply dynamics, environmental impact, and decentralization.

This article focuses on the effects of the merger one year after its implementation. It examines the dwindling supply of Ethereum development , the rise of Liquid Staking Tokens (LST), and the challenges posed by the growing dominance of specific protocols. Join us on a journey through the post-merger Ethereum ecosystem, where supply is shrinking, deflation is looming, and decentralization remains a critical issue.

Ethereum Supply Reduction and Deflation

The merger led to fundamental changes in the economic landscape of Ethereum, altering the issuance of Ether (ETH) and setting the stage for a deflationary future.

Merger Proposal Dynamics

The merger, hailed as Ethereum’s leap into a greener and more sustainable future, resulted in a significant reduction in the supply of new Ether. Before The Merge, Ethereum ran on an energy-intensive Proof of Work (PoW) consensus mechanism, where miners were rewarded with freshly minted ETH for validating transactions.

With The Merge’s transition to Proof of Stake (PoS), a remarkable transformation has occurred. New daily ETH supply dropped by over 80%, from 13,500 ETH to just 2,300 ETH. This significant reduction reflects Ethereum’s desire to control inflation and manage its monetary policy more precisely.

Deflationary Ethereum Concept

The idea that Ethereum will become a deflationary asset received trac after the merger. The key driver of this change is Ethereum’s burning mechanism. Unlike the PoW era, where miners were rewarded in the form of ETH, PoS validators are rewarded primarily through transaction fees. It is important to note that a portion of these fees are permanently burned, effectively taking ETH out of circulation.

Essentially, Ethereum’s economic model has evolved to prioritize the removal of ETH from circulation, creating a scenario where the supply of ETH could decrease over time. This deflationary characteristic is consistent with a broader economic principle that often underlies cryptocurrencies: limited or diminishing supply.

ETH is permanently excluded from supply

A year after the merger, Ethereum saw nearly 1 million ETH removed from its supply permanently. This monumental reduction signifies the success of Ethereum’s deflationary mission. To put this into perspective, this decline means that there are almost 300,000 less ETH in circulation than when The Merge was implemented.

In the world of cryptocurrencies, where tokenomics plays a critical role in shaping investor sentiment, Ethereum’s path to becoming a deflationary asset is a major milestone. This underscores the network’s commitment to sustainable development and responsible monetary policy, putting Ethereum on a distinct path in the ever-evolving crypto landscape.

Increase in the number of liquid staking tokens (LST)

The post-merger evolution of the Ethereum ecosystem has led to the emergence of a new generation of digital assets known as liquid staking tokens (LSTs), fundamentally changing the Ethereum staking landscape.

The Role of the Ethereum Merger and Shanghai Update

The catalyst for the emergence of Liquid Saving Tokens (LST) may be trac The Merge, Ethereum’s monumental transition from Proof of Work (PoW) to Proof of Stake (PoS). This transition fundamentally changed the way Ether (ETH) is protected and rewarded on the network. Additionally, the subsequent Ethereum Shanghai upgrade implemented in April allowed for ETH staking, setting the stage for the LST boom.

Understanding Liquid Staking Tokens

LST is a new category of digital assets that represent underlying positions of staked Ether (ETH). Essentially, when a person stakes their ETH in a PoS system, they receive a corresponding amount of LST in return. These tokens can then be freely traded on cryptocurrency exchanges or used in various DeFi.

LSTs offer a level of flexibility that traditional staking assets lack. LST holders can actively participate in DeFi activity, lending their assets or simply trading them while their underlying ETH continues to receive staking rewards in the PoS system.

Accepting liquid tokens for staking

The adoption of Liquid Saving tokens has witnessed significant growth, solidifying their place in the Ethereum ecosystem. Currently, approximately 10.8 million ETH, equivalent to 42.5% of all ether allocated, is stored in liquid staking protocols. This surge in adoption highlights the demand for LSTs and their key role in expanding the utility of pledged assets.

Key Liquid Staking Protocols

Several liquid staking protocols have received significant attention and acceptance within the Ethereum community. Notable among them is Lido, which is considered one of the leading LST service providers. The Lido ecosystem has seen significant growth, with ETH volume increasing by an impressive 82% since the start of the year, reaching 8.6 million ETH.

Additionally, Coinbase into the LST space with cbETH has increased the variety of available options for users looking to leverage their ETH stakes. rETH Rocket Pool also has a prominent position with 450,000 ETH locked in the protocol.

The rise of Liquid Stakes tokens illustrates Ethereum’s ability to innovate and adapt. This has not only expanded the utility of staked assets, but has also provided users with newfound flexibility and opportunity in the DeFi environment. As Ethereum continues to evolve, Liquid Saving tokens remain a prominent and dynamic element in this ever-changing blockchain .

Problems of Lido Domination and Centralization

While liquid staking tokens (LST) have ushered in a new era of flexibility and utility on the Ethereum network, concerns have arisen about the growing dominance of one particular protocol, Lido, and its implications for centralization.

dent domination Lido

Lido, as one of the prominent players in the LST ecosystem, has seen significant growth in its Ether (ETH) holdings. Since the beginning of the year, Lido’s ETH holdings have grown by an impressive 82%, soaring from 4.6 million ETH to 8.6 million ETH. This staggering accumulation underscores Lido’s dominance in the betting market.

Centralization problems

The rapid growth of Lido’s ETH holdings has raised serious concerns about centralization on the Ethereum network. However, when one organization or protocol accumulates a significant portion of the staked assets, the delicate balance of decentralization is upset.

Management Issues and Potential Attacks

Lido’s dominance raises a critical question: what happens when a protocol becomes a major participant in the network? Centralization of this nature can potentially lead to governance problems where one organization has disproportionate influence over network decisions, creating an environment ripe for conflicts of interest.

Moreover, if Lido’s dominance remains unchecked, it could facilitate governance attacks on the Ethereum network. In such a scenario, a protocol with significant influence could push for changes that primarily serve its own interests, undermining the principles of decentralization that Ethereum holds dear.

Recommendations from Vitalik Buterin

Recognizing the need to maintain a balanced and decentralized ecosystem, Ethereum co-founder Vitalik Buterin offered recommendations. Buterin proposed that staking providers controlling more than 15% of the ETH allocated should actively increase user fees to deter adoption until their dominance falls below this threshold.

This recommendation serves as a preventive measure to prevent over-centralization and encourage a diverse and inclusive betting environment. He emphasizes the importance of maintaining the ethos of decentralization that underlies blockchain technology.

The way forward

Since the merger marks a major milestone in the history of Ethereum, it is critical to evaluate the achievements and challenges that lie ahead.

The Merge achievements

The implementation of The Merge led to a revolutionary shift in Ethereum. This dramatically reduced the supply of new ether (ETH) by cutting daily issuance by 80%, pushing Ethereum into deflationary territory. The burning mechanism combined with Proof of Stake (PoS) has paved the way for Ethereum to become a more environmentally sustainable and cost-effective network.

Solving the problem of decentralization and governance

While Ethereum has made significant progress in reducing its supply and environmental impact, it has not gone unnoticed. Problems of centralization and control, exemplified by the dominance of the Lido, came to the fore.

Ethereum recognizes the need to find a delicate balance between innovation and decentralization. Vitalik Buterin’s recommendations to curb the excessive dominance of staking providers are a step towards preserving the democratic nature of the network.

Current developments and updates

Ethereum’s journey does not end with the merger. The network remains committed to improving efficiency and the user experience. Ethereum Improvement Proposal (EIP)-4844, known as “proto-dunksharding,” is just around the corner.

This update aims to reduce gas fees and increase transaction throughput, solving one of the pressing issues in the Ethereum community. By introducing data blocks that efficiently process and store data, Ethereum aims to remain at the forefront of blockchain innovation.

The Future of Ethereum

As Ethereum moves forward, its future looks promising. The network has overcome challenges, adapted to changing conditions, and remained a stalwart in the world of cryptocurrencies.

Ethereum’s role goes beyond a simple blockchain; it is a platform for innovation, a catalyst for change and a beacon of decentralization. In the ever-evolving world of cryptocurrencies, Ethereum remains poised to lead the way by providing solutions to real-world problems and changing the way we see the future of finance and technology.

Conclusion

Following Ethereum’s landmark transition known as the “Merger”, several important findings have emerged that will shape the course of this pioneering blockchain network.

The merger marked the beginning of a significant shift in the history of Ethereum, demonstrating an impressive 80% reduction in Ethereum’s daily issuance. This transformation catapulted Ethereum into a deflationary future. At the same time, the emergence of Liquid Staking Tokens (LST) opened up a new level of versatility. LSTs allow users to participate in trading and delve into DeFi applications using their Ether staking. However, concerns have arisen due to Lido’s prominent position in the LST ecosystem, which raises legitimate concerns about centralization and governance.