The transition of Ethereum to Proof-of-Stake (PoS) addressed several issues, such as the environmental damage caused by energy-intensive PoW mining. However, as Margaux Nijkerk and Sam Kessler note, it introduced new challenges—including concerns around centralization, MEV, and censorship.
1. Ethereum's Energy Consumption Dropped by 99.9%
Ethereum's Merge overhauled the network’s consensus mechanism—the system used by its decentralized community of operators to secure the network and process transactions. The old Proof-of-Work (PoW) model relied on electricity-guzzling mining, where operators competed to process blocks (and earn rewards) by consuming computational power.
Switching from mining to staking drastically reduced Ethereum’s energy footprint—eliminating the energy-intensive system previously used to generate blocks and secure users.
Post-Merge Emissions Plummet
A year after the Merge, Ethereum’s emissions have sharply declined. The new PoS system consumes 99.9% less energy than its mining-based predecessor. Regardless of other successes or failures, it’s now difficult to frame Ethereum as environmentally harmful.
2. Stake Distribution Raises Centralization Concerns
While PoW concentrated power among mining conglomerates, PoS introduced staking—requiring validators to lock 32 ETH (~$50,000) to participate. Despite lowering hardware barriers, centralization persists:
- Technical and Financial Barriers: Running a validator node remains complex and costly, pushing users toward intermediaries like Coinbase and Lido.
- Dominance of Lido: The decentralized staking pool Lido controls 32.3% of staked ETH, nearing the 33% threshold that developers warn could trigger security risks.
Critics argue that staking intermediaries may gain disproportionate control over block validation, undermining decentralization.
3. MEV and Censorship Challenges
Post-Merge, validators profited from Maximal Extractable Value (MEV)—a practice where they strategically reorder transactions to maximize profits. This "invisible tax" raised concerns:
- MEV-Boost: Flashbots’ software (used in 90% of blocks) optimizes transaction ordering but centralizes power.
- Censorship Risks: When Flashbots blacklisted Tornado Cash-related transactions, 35% of blocks complied, sparking backlash.
Efforts to diversify relays have reduced reliance on Flashbots, but MEV remains contentious.
4. Liquid Staking Tokens Dominate ETH Markets
Liquid staking surged post-Merge, offering:
- LSTs (Liquid Staking Tokens): Tradeable derivatives (e.g., Lido’s stETH) that earn interest while remaining DeFi-compatible.
- Accessibility: Eliminates the 32-ETH minimum for solo staking.
Despite Shapella enabling unstaking, LSTs thrive—now a $20B market, led by stETH (72.24% share).
5. ETH Supply Turns Deflationary
The Merge adjusted Ethereum’s tokenomics:
- EIP-1559: Burns a portion of transaction fees, reducing supply.
- Current Stats: ETH supply has decreased by 0.24% post-Merge.
While deflation could boost ETH’s value, macroeconomic factors currently outweigh supply effects.
FAQs
Q: Is staking ETH profitable?
A: Yes, but rewards vary based on network activity and validator performance.
Q: What risks do LSTs carry?
A: Smart contract vulnerabilities and de-pegging from ETH are potential concerns.
Q: How does MEV affect users?
A: MEV can front-run trades, costing users extra fees. Tools like MEV-Boost aim to mitigate this.