One year after the transition to proof of stake, Ethereum has experienced significant improvements and challenges. The most notable change has been the shift from proof of work to proof of stake, resulting in a drastic reduction in energy consumption. According to data from The Cambridge Centre for Alternative Finance, Ethereum’s energy use has dropped by over 99.9% since the transition. This shift has made Ethereum economically deflationary, with more Ether (ETH) being removed from supply than issued to secure the network.
Despite the optimistic expectations for a surge in the price of Ethereum due to this deflationary pressure, the price has been affected by macroeconomic headwinds such as the banking crisis and rising inflation. While the growth of ETH has been overshadowed by Bitcoin’s price increase, the focus of the proof-of-stake upgrade lies in the introduction of stakers to secure the network. The subsequent Shapella upgrade in April 2023 further drove ETH towards staking, benefiting liquid staking providers such as Lido and Rocket Pool.
Liquid staking has become dominant in the Ethereum ecosystem since the merge, with over $19.5 billion worth of ETH currently staked through liquid staking protocols. Lido is currently the largest staking provider, accounting for 72% of all staked ETH. However, concerns have been raised about the level of control granted to staking providers like Lido. While liquid staking removes barriers to mining, it also centralizes control, which goes against the principle of decentralization in blockchain networks.
Some Ethereum liquid staking providers have proposed a 22% limit rule to ensure network decentralization, but Lido has voted against it. This has sparked concerns about the potential centralization of validation on Ethereum, as Lido currently controls 32.26% of all staked Ether on the network. While liquid staking is seen as beneficial in the long run, there are still challenges to overcome.
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One pressing concern for Ethereum is the growing regulatory pressure against crypto and blockchain in the United States. Regulatory bodies, particularly in the US, are seemingly determined to eliminate the US-based blockchain industry, which could have devastating effects on Ethereum and the global blockchain community.
Client diversity is another issue that Ethereum faces. Currently, the majority of active Ethereum nodes are run through centralized web providers like Amazon Web Services. This exposes the Ethereum blockchain to a centralized point of failure. Vitalik Buterin, co-founder of Ethereum, has emphasized the need to make it easier for everyday people to run nodes in order to maintain decentralization in the long-term. He proposes the concept of statelessness, which reduces data requirements for node operators to near-zero, thereby reducing costs and hardware requirements.
While Ethereum has made significant progress in reducing energy consumption and improving access to the network through proof of stake, there are still technical challenges to address. Issues such as centralization in liquid staking providers, regulatory pressures, and client diversity need to be overcome in order to ensure the long-term success and decentralization of Ethereum.
