More than two months have passed since Ethereum completed its monumental transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS), an event widely known as "The Merge." This upgrade was one of the most anticipated technological milestones in the blockchain space, promising to address scalability, energy consumption, and economic sustainability.
Many industry observers viewed the shift as a major test for Ethereum. Concerns were raised about potential vulnerabilities, increased centralization risks, and the possibility of a "buy the rumor, sell the news" market reaction. Now that the network has been operating under the new consensus mechanism, it is time to evaluate its performance, economic impact, and future trajectory.
Examining Ethereum’s Deflationary Mechanism
A central promise of the Merge was the introduction of a deflationary economic model. By combining EIP-1559's fee-burning mechanism with the significantly reduced issuance rate of PoS, Ethereum was expected to become a net deflationary asset under sufficient network activity.
Data from sources such as Ultra Sound Money indicates that, since the Merge, the supply of ETH has decreased by over 5,915 ETH. This suggests the deflationary mechanism is functioning as intended. To understand the trend, the initial 60-day period can be divided into three distinct phases:
- Phase One (Post-Merge, Low Activity): From September 15 to October 7, the crypto market remained in a bearish state, resulting in lower on-chain activity. Average gas fees fluctuated between 10 and 15 gwei. Despite the low activity, the new issuance rate was dramatically lower than under PoW—approximately 563 ETH issued per day, compared to nearly 15,000 ETH daily under the previous system.
- Phase Two (Rise of XEN and Increased Activity): Between October 8 and November 8, the emergence of the XEN token project spurred a noticeable increase in gas fees, which often ranged from 20 to 50 gwei. This higher network usage accelerated the burn rate of ETH via EIP-1559, nearly offsetting all the ETH issued in the first phase.
- Phase Three (FTX Collapse and High Activity): The collapse of the FTX exchange in November triggered massive on-chain movements, with gas fees occasionally exceeding 100 gwei. This surge firmly placed Ethereum into a net deflationary state, burning ETH faster than it was issued.
Conservative estimates indicate that the Merge has prevented the issuance of over 880,000 ETH in its first two months—equivalent to more than $1.1 billion in potential sell pressure that would have otherwise entered the market. This fundamental shift in economics is one reason why ETH has demonstrated relative strength compared to other major assets during recent market turbulence.
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Addressing Centralization Concerns
Since the transition, some commentators have expressed concerns about the increasing centralization of Ethereum’s validation process. Reports indicated that a significant percentage of blocks were being produced by entities compliant with regulatory standards such as OFAC. Additionally, the significant market share of liquid staking protocols like Lido drew attention.
It is important to contextualize these concerns:
- Regulatory compliance among enterprise staking providers is a reality, but it does not equate to full network censorship. As long as a portion of validators remains permissionless, transactions can still be processed, albeit sometimes with longer confirmation times.
- The ecosystem is actively developing more decentralized staking solutions. Over time, market competition and community preference are expected to balance the distribution of stake.
- Ethereum founder Vitalik Buterin has noted that the situation is somewhat overblown. He compared it to Bitcoin mining, where a small number of pools control the majority of hashrate. He also emphasized that Lido is not a monolithic entity but a protocol with many independent operators.
The long-term health of the network depends on continued progress in decentralizing stake distribution, but the current state does not represent an immediate threat to network integrity.
Regulatory Landscape and the SEC Question
The shift to PoS also led to discussions about whether Ethereum could be classified as a security under U.S. regulations, particularly by the Securities and Exchange Commission (SEC). The Howey Test is often cited in these debates, which assesses whether an asset involves an investment of money in a common enterprise with an expectation of profit derived from the efforts of others.
Several factors mitigate this concern:
- Numerous PoS networks have operated for years without being classified as securities.
- Major financial institutions and a broad user base have a significant stake in Ethereum’s success, creating considerable momentum against punitive regulatory actions.
- Legal precedent, such as the ongoing case between the SEC and Ripple, suggests that outright classification is neither straightforward nor guaranteed.
While regulatory risk can never be fully dismissed, the broader ecosystem is likely to resist any attempt to impose restrictive regulations on Ethereum.
Network Performance and Development Progress
From a technical standpoint, the Merge has been a remarkable success. The transition was seamless, requiring no action from users or most developers. Network stability and security have remained robust, with no major incidents or chain disruptions.
With the Merge behind them, core developers have shifted focus to future upgrades, particularly the upcoming Shanghai hard fork. Key priorities included in Shanghai are:
- Staking Withdrawals: Enabling validators to withdraw their staked ETH, which is crucial for improving liquidity and encouraging further participation.
- EIP-4844 (Proto-Danksharding): A scaling upgrade designed to significantly reduce transaction costs for Layer 2 rollups by introducing a new kind of transactional blob.
The successful implementation of these upgrades will further enhance Ethereum’s scalability and usability.
The Rise of Layer 2 Scaling Solutions
An encouraging development has been the growth of Layer 2 networks. Data from Orbiter Finance showed that in early November, combined transaction volume on major Layer 2s surpassed that of the Ethereum mainnet for the first time.
This milestone indicates that users are increasingly adopting scaling solutions for day-to-day transactions, reducing the load on the base layer while benefiting from its security. This trend also positions Ethereum not just as a standalone chain, but as a foundational security layer for an entire ecosystem of high-performance networks.
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Frequently Asked Questions
What does "Ethereum Merge" refer to?
The Merge represents Ethereum’s transition from a Proof-of-Work consensus algorithm to Proof-of-Stake. This upgrade significantly reduced energy consumption and changed the network's economic model by lowering the rate of new ETH issuance.
Is Ethereum now a deflationary asset?
Under conditions of moderate to high network activity, yes. The combination of EIP-1559 (which burns a portion of transaction fees) and reduced ETH issuance can lead to a net decrease in the total supply of ETH, making it deflationary.
Can I now withdraw my staked ETH from the Beacon Chain?
Not immediately after the Merge. The ability to withdraw staked ETH is scheduled to be enabled in the next major upgrade, the Shanghai hard fork, expected in the coming months.
Does the Merge make Ethereum faster and cheaper to use?
Not directly. The primary focus of the Merge was to change the consensus mechanism. Scalability improvements are being addressed through separate upgrades, such as the implementation of EIP-4844 and the continued expansion of Layer 2 rollups.
Are staking rewards now available to all users?
Yes, but participation often requires 32 ETH to run a solo validator node. Alternatively, users can delegate smaller amounts through liquid staking protocols or centralized exchanges, though these options involve trusting a third party.
What is the significance of Layer 2 transactions surpassing mainnet transactions?
This indicates that scaling solutions are maturing and handling a substantial portion of user activity. It is a positive sign for Ethereum's long-term scalability and adoption.
Conclusion
The Merge has proven to be a success both technically and economically. Ethereum has navigated its major test without significant issues, establishing a deflationary monetary policy and setting the stage for future scaling improvements. While challenges such as stake decentralization and regulatory uncertainty remain, the network continues to develop and evolve.
The full impact of Ethereum’s new economic model may take time to materialize in market dynamics, but the foundation has been firmly established. The journey toward a more scalable, sustainable, and decentralized network continues, with the community now focused on the next set of upgrades.