What Has Changed After the Ethereum Merge?
The Ethereum Merge was the most anticipated event in the crypto and blockchain space since the last Bitcoin halving. On September 15, 2022, the Merge finally came to fruition after several years of work and coordination by Ethereum developers.
Almost two weeks after the Merge, it’s only appropriate to look at Ethereum and see what has changed on the network following the Merge and if there are any lessons to draw from this.
A big reduction in energy consumption
The first impact of the Merge is the drastic reduction in Ethereum energy consumption. Days before the Merge, Ethereum had a hashrate of over 900,000 Gh/s. This shows just how significant its energy usage was, and supporters of the Merge were quick to point out how this would change. In fact, Ethereum researcher Justin Drake estimates that the Merge reduced global energy usage by 0.2%. Supporters have called it one of the biggest decarbonization events in history.
This is not surprising as the Merge reduced the Ethereum network’s energy consumption by more than 99%. However, while Ethereum significantly reduced its own carbon footprint, the crypto space as a whole still consumes a massive amount of energy. In addition, some of the miners that were forced to leave Ethereum moved to other Proof-of-Work networks such as Ethereum Classic, Ergo, and Ravencoin. While these networks can’t accommodate all the miners that were forced off Ethereum, the ones that move there continue to consume energy.
Centralization and censorship concerns
One of the major concerns of those against the Merge was that Ethereum would become more centralized and vulnerable to censorship post-Merge. This fear is understandable. Just five entities control over 65% of Ethereum validators. Of this number, 3 — Coinbase, Binance, and Kraken — are centralized exchanges. Lido, which has the largest stake, is a decentralized staking pool, but like two of the operators — Kraken and Coinbase — it could be subject to the control of US regulators.
In the face of the recent Tornado Cash ban and the US Securities and Exchange Commission’s attempts to assume jurisdiction over Ethereum, it is understandable why such centralization of validators could be a cause for concern.
The effects of that centralization are already evident in the major block producers. After the first 1000 blocks on Ethereum Merge, Gnosis chain founder Martin Köppelmann shared data showing that Lido and Coinbase alone were responsible for creating 420 of those blocks. Santiment also stated that its Post Merge Inflation dashboard shows that 46.15% of the POS nodes storing data, processing transactions, and adding new blocks are tied to just two addresses. But this is likely due to flash bot relays.
Regardless of this centralization in validation, Ethereum stakeholders and even staking operators such as Coinbase believe the network remains censorship-resistant at the base level. Time will tell how correct this view is.
A slowdown in ETH supply growth
One of the most notable aspects of the Ethereum merge is the reduction in the issuance rate. The drop in how many ETH are being issued means that the Ethereum supply is increasing at a much slower pace. Since the Merge, the Ethereum supply has grown by 8,096.61 ETH, according to data from ultrasound.money. If the network were still using PoW, it would have increased by an estimated 157,663.46 ETH.
This is because a much smaller amount of ETH is required to reward validators than what was required to reward miners. For example, since Proof-of-Stake became active in December 2020, it has only issued 0.8 million tokens as a reward for validators. By comparison, Proof-of-Work issued 49.8 million ETH to miners over eight years.
However, ETH is yet to become deflationary. Over 7,000 Ethereum has been burnt in the last seven days, but that only offset issuance by about 61%. The network will be deflationary when more tokens are being burned than issued. For this to happen, the gas fees on Ethereum will have to grow significantly, which means network activity will have to rise. That’s unlikely to happen in the current bear market.
The Ethereum price has dropped significantly
There was a lot of speculation before the Merge about how it would affect the price of ETH. Most of the predictions pointed to the price increasing post-Merge. But that has not happened yet. Since the Merge, the ETH price has dropped by about 20%. However, a large portion of this decline could be attributed to the overall bearish trend in the cryptocurrency market.
Read the full article: https://coincodex.com/article/19574/what-has-changed-after-the-ethereum-merge/