One Year After the Merge: What's the Situation of Ethereum?

The development of the crypto world has been so rapid that the merge of Ethereum feels like a long time ago. However, it has only been about a year since the network fully transitioned to Proof of Stake (PoS). In terms of price, Ethereum's trading price is roughly the same as it was in September 2022 when the merge took place, with the price of ETH being around $1,600 the day before the merge. But this is just the tip of the iceberg, as there have been substantial changes in many aspects since Ethereum's merge. In this issue, the veDAO Research Institute will take stock of the various changes that have occurred in the year after the merge of Ethereum.

Energy Consumption

Before the transition, Ethereum used the same consensus mechanism as Bitcoin to verify on-chain transactions: Proof of Work (PoW). It required miners to compete to solve complex mathematical equations and in exchange for participating in the energy-intensive process, miners were rewarded. However, with Ethereum's transition to PoS, this means that validators, not miners, need to stake Ethereum to ensure network security in exchange for rewards. One of the most significant impacts is the reduction in Ethereum's energy consumption. A report from the Crypto Carbon Ratings Institute (CCRI) indicates that Ethereum's energy usage has decreased by about 99.99% since the merge, resulting in a 99.99% reduction in Ethereum's carbon footprint.

Cryptocurrencies have gained notoriety for consuming large amounts of energy. Therefore, environmental factors such as ESG ratings will be obstacles to the adoption of cryptocurrencies. Due to concerns about the environmental impact of cryptocurrencies, initiatives by financial institutions such as BlackRock and Fidelity have garnered attention. The Ethereum merge has made these opposing voices lose their significance.

Liquidity Staking

Since the merge of Ethereum, the amount of Ethereum staked has nearly doubled. According to data analyst @hildobby's Dashboard on Dune, the current amount of ETH staked in the Ethereum deposit contract has exceeded 26.96 million, with a staking rate of 22.44%.

https://dune.com/hildobby/eth2-staking

However, the Ethereum upgrade has also raised concerns about centralization and censorship. This is because there are concerns that control over validating network transactions may be isolated in the hands of a few, whether it's companies like exchanges or projects that make it easier for users to pool funds and receive staking rewards. Prior to the Ethereum merge, some were particularly concerned that exchanges like Coinbase might participate in staking due to the US Treasury and OFAC's lawsuit against a group of Tornado Cash users, as Coinbase had funded them. Due to concerns that centralized entities may scrutinize transactions to maintain compliance, applications like Lido Finance have become a better choice in terms of decentralization.

However, Lido now accounts for about 32.3% of all staked ETH, and it is now considered a potential weakness in the decentralization of the Ethereum ecosystem, which has raised concerns among some community members. They say that Lido's growing influence is undermining the decentralization features of the entire Ethereum.

According to CoinGecko data, STETH has performed well in terms of liquidity staking tokens, with a market value of $13.8 billion. As for Rocket Pool ETH (RETH), the second largest token by market value in the Ethereum market, its market value is $912 million.

Nevertheless, liquidity staking has been a major source of growth in decentralized finance. Liquidity staking allows ETH holders to stake their tokens for rewards and still be able to utilize the value of Ethereum by issuing and pegging corresponding tokens to their price. Despite a decrease in the value of assets related to decentralized exchanges since the merge, liquidity staking continues to thrive.

Scaling Solutions

The merge was not intended to increase the speed of Ethereum, so according to data from the analysis website L2Beat, Ethereum's average TPS (transactions per second) has mostly hovered around 10 since September last year. Nevertheless, it has laid the foundation for what's to come. According to Vitalik Buterin's Ethereum roadmap vision outlined before the merge in July last year, this "surge" is part of a series of upgrades planned after the merge, which are expected to improve Ethereum's scalability.

However, scaling solutions aimed at addressing Ethereum's current limitations are increasingly appearing in the cryptocurrency space. According to L2Beat's data, the average TPS between all Ethereum L2 networks has now exceeded 50, a significant improvement from last year.

In summary, well-known L2 networks such as zkSync Era, Optimism, and Arbitrum Nova have collectively processed over 61 million transactions in the past 30 days. This is twice the number of Ethereum transactions during the same period. It can be said that the merge's enhancement of Ethereum's underlying security has fueled the emergence of recent L2 technologies. Overall, the merge has indeed laid the groundwork for further enhancing scalability.

U.S. Securities and Exchange Commission (SEC)

Meanwhile, staking has become a regulatory hot spot in the United States, with the SEC investigating several cryptocurrency exchanges that offer services to help users earn network rewards.

Kraken reached a settlement with the SEC in February, involving a $30 million fine, for its staking-as-a-service program constituting an unregistered securities offering. Similar claims have been made in lawsuits against Coinbase and Binance for their respective staking products. Although the SEC's lawsuits against Binance and Coinbase involve some tokens, claiming they are examples of unregistered securities, some have noticed and questioned why regulatory agencies have not classified tokens using PoW as illegal assets.

However, there is still a disagreement on how to classify Ethereum by U.S. regulatory agencies. This has led to a clear turf war between the two largest financial regulatory agencies, the SEC and the Commodity Futures Trading Commission (CFTC): CFTC Chairman Rostin Behnam stated in March that ETH is a commodity; while in February, SEC Chairman Gary Gensler stated that "everything other than Bitcoin" is a security, and then he avoided questions about Ethereum in April.

Conclusion

Ethereum's core developers have been formulating the next major upgrade plan for Ethereum, called the "Dencun Upgrade." It includes the introduction of a feature called proto-danksharding, which, once fully implemented, is expected to scale Ethereum to over 100,000 transactions per second. Other features under development, such as account abstraction, will effectively make managing crypto wallets as simple as managing email accounts. In early this month, Vitalk mentioned a feature called "Stateless Clients" in his speech at the Korea Blockchain Week, which will make it possible to run Ethereum nodes on smartphones.

https://ethereum.org/en/roadmap/danksharding/

Looking back, compared to the turmoil and collapses in the crypto market in 2022, this merge seems like a mundane footnote in crypto history. But for the future, this may be a beacon that illuminates the overall direction of Ethereum, making people believe again that Ethereum can achieve these major technological upgrades and accomplish ambitious goals; although Ethereum may be slower than we hope, it will eventually continue to evolve while staying true to its values.

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