- Ethereum’s annual carbon footprint declined significantly since The Merge.
- Ethereum became deflationary, but there was yet to be a big impact on ETH’s value.
Ethereum [ETH] maximalists and much of the crypto industry celebrated the one-year anniversary of The Merge, which marked a historic shift from the proof-of-work (PoW) consensus mechanism to the proof-of-stake (PoS).
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A greener Ethereum
Intended to cut down the exponentially increasing power consumption and build an environment-friendly image for the blockchain, the results have been nothing short of astounding.
As per data from Cambridge Bitcoin Electricity Consumption Index (CBECI), Ethereum’s annual electricity usage was 0.00731 terawatt-hours (TWh) at the time of publication, a staggering 99.9% drop since the Merge. For context, this was less than Bitcoin [BTC], whose annual consumption stood at 120.31 TWh.
Moreover, Ethereum now draws less power than payment company PayPal and online steaming giant Netflix.
Consequently, Ethereum’s annual carbon footprints have also reduced, falling by more than 99% to 2,659 tons of CO2, according to data by Crypto Carbon Ratings Institute.
The Merge was a watershed event in the brief history of Ethereum. Under the new PoS model, staked ETH, rather than expensive hardware, secures the network and validates transactions.
By eliminating the power-guzzling devices from the scope, which competed with each other to solve complex cryptographic problems, Ethereum seemed to have made a decisive shift to sustainability and scalability.
In the long run, it could boost Ethereum growth because investors will no longer have to cope with the stigma surrounding investments in non-eco-friendly technologies.
Ethereum goes into deflation
While Ethereum clearly improved its green credentials, there was more to celebrate as far as the long-term economic outlook was concerned.
According to ultrasound.money, the Ethereum network experienced deflation following the Merge, with a net supply reduction of roughly 300,000 ETH as of this writing. At the prevailing burn rates, the net supply was shrinking at an annual rate of 0.248%.
The significance of the Merge could be gauged by the fact that had the transition not taken place, ETH’s total supply would have increased by more than 3.8 million with an annual inflation rate of 3.16%.
Before transitioning to the PoS, miners guarding the Ethereum network were issued approximately 13,000 ETH/day, according to Ethereum.org. This was because the process of mining was an economically intensive activity, which historically required high levels of ETH issuance to sustain.
However, after switching to the PoS, mining became redundant and only staking remained a valid means of block production. Furthermore, with the PoS mechanism, a set amount of ETH is burned for each transaction. This corresponds to the minimum amount required for a transaction to be considered valid, i.e. base fee.
The long-term projections painted a happy picture for ETH. The supply will reportedly hover around the 120 million mark until August 2024. After this, the supply would steadily start declining until an equilibrium is attained.
Staking interest at its peak
While the Merge was a game changer, some key aspects of the PoS transition had to wait until the completion of the Shapella upgrade. Foremost among them was the right granted to stakers to unlock their holdings at will.
With more freedom and renewed confidence in staking activity, more and more users came forward to lock their holdings in pursuit of rewards. As per the latest update by Glassnode, the total staked supply hit a fresh peak of 29.06 million. This represented a growth of 58% since the day of Shapella execution.
View metric:https://t.co/SzbMPqvhlb pic.twitter.com/1LZvcNI1RO
— glassnode alerts (@glassnodealerts) September 15, 2023
The increased interest in staking augured well for the security of the network.
Some concerns linger
Amidst the optimism and bullish sentiment, it was also necessary to examine the misses. Matt Cutler, CEO & Co-Founder of blockchain infra provider Blocknative, pointed out a few concerns around decentralization of Ethereum’s core infrastructure.
“In the last 14 days, ~75% of the blocks on the Ethereum network were built by just three block builders – two of which widely recognized as vertically integrated Searcher/Builders). This seems less decentralized than the ecosystem aspires to be.”
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Furthermore, if one looked at ETH’s price trajectory since the Merge, there has only been an 11% increase in value, according to data from CoinMarketCap.
This implied that, contrary to common perception, major technological improvements still do not put significant upward pressure on cryptos. The market continues to be driven by sentiment around the asset, rather than its fundamentals.