Ethereum has been transitioning from Pow to PoS for over a year now, and this transformation, known as' consolidation ', introduces the concept of' pledge ', which is a new method of adding and approving trading blocks to the blockchain.In PoW mode, miners compete to add blocks by solving password challenges

Ethereum has been transitioning from Pow to PoS for over a year now, and this transformation, known as' consolidation ', introduces the concept of' pledge ', which is a new method of adding and approving trading blocks to the blockchain.

In PoW mode, miners compete to add blocks by solving password challenges. In PoS mode today, Ethereum validators pledge 32 ETHs on the network and are randomly selected to add blocks. In these two modes, if the blocks of miners and validators are added to the blockchain, they will receive some ETH token rewards.

By pledging, Ethereum has greatly reduced the impact of blockchain on the environment, but it still faces a series of challenges around centralization, censorship systems, and the utilization of certain infrastructure intermediaries. The following are five major changes in the Ethereum ecosystem since its merger one year ago.

Ethereum energy consumption decreased by 99.9%

The merger of Ethereum has completely reformed the consensus mechanism of the network, and the "decentralized" community of network operators is used to protect the network and process transaction systems. The old PoW (Proof of Work) model used power consuming "mining" systems to run, and network operators essentially competed for processing blocks by consuming computing power.

The transition from encrypted mining to pledge is expected to significantly reduce Ethereum's energy consumption and completely eliminate the energy intensive systems previously used to generate blocks and protect users.

Ethereum's energy consumption before the merger was approximately the size of a small country, and its energy use statistics were the main focus of debate among early NFT and DeFi critics. According to the Cambridge Bitcoin Power Consumption Index, Bitcoin still uses PoW (Proof of Work) to power its network, and its energy consumption is equivalent to that of Singapore.

After one year of merger, the new emissions of Ethereum have sharply decreased. Ethereum's new proof of equity system consumes 99.9% less energy than the old mining system. Regardless of whether other aspects of this upgrade were successful or unsuccessful, it is now difficult to connect Ethereum with the affected environment.

Pledge allocation triggers centralization issues

In addition to being criticized for its high energy costs, Ethereum's old consensus model has also been criticized for concentrating power in the hands of a small group of cryptocurrency mining companies that have the funds, dedicated hardware, and expertise to build large-scale mining facilities. Before the merger, only three mining pools dominated most of Ethereum's computing power.

When Ethereum transformed into PoS, the Ethereum network abandoned mining and instead supported pledge. Eliminated the hardware requirements and computational costs of PoW, partly to allow more people to participate in Ethereum network operations.

However, one year after the merger, centralization remains one of the biggest challenges faced by Ethereum. In order to make a pledge on Ethereum, the verifier needs to lock in 32 ETHs in the network, which is approximately $50000. These funds can earn stable interest, but if the verifier makes mistakes or engages in dishonest behavior, these funds may be revoked. Setting up validator nodes to pledge on the network is a complex task, and improper setting may lead to economic penalties.

Due to the cost and technical barriers of establishing nodes, intermediary services have emerged. The "decentralization" project from companies such as Coinbase and Lido allows users to centralize their ETHs and create 32 ETHs for nodes. These intermediary entities undertake most of the heavy work, taking ETH from users, pledging on their behalf, and extracting a portion of the rewards obtained from operational validators.

Even before the merger, some anti PoS activists were concerned that pledging could increase Ethereum's centralization, which means that a small portion of these intermediaries may gain disproportionate control over adding those blocks to the network.

This situation seems to be unfolding, and currently, the largest pledge provider is the decentralized pledge pool Lido. Lido accounts for 32.3% of the total share of pledged ETH, which has raised concerns about the degree of centralization when it approaches the 33% threshold. Developers claim that breaking the 33% threshold may lead to security issues.

MEV and review system

After the merger of Ethereum, validators successfully achieved significant additional profits through a method called Maximum Extractable Value (MEV). Verifiers and builders can charge users fees by strategically inserting or reordering transactions before adding them to the network.

When MEV unexpectedly became the carrier of centralization and censorship on the network, third parties intervened and attempted to solve this problem.

Ethereum R&D company Flashbots has invented MEV boost, a software that validators can run to reduce the negative effects of MEV. However, Flashbots' solution to MEV issues is controversial. Although some people believe that MEV should be completely eradicated, Flashbots' introduction of MEV boost has exacerbated the questioning of centralization.

Currently, approximately 90% of the blocks on Ethereum are processed through MEV-Boost, which optimizes how transactions are organized into blocks to maximize profits for validators.

The popularization of MEV boost has become the focus of online debate. As mentioned earlier, MEV is seen by some as unfairly charging users. The core role of Flashbots in the Ethereum MEV market has been criticized, as most blocks built through Flashbots software are "relayed" or passed to validators through Flashbots themselves.

This centralization is seen by some as a potential censorship medium, and when the US Treasury approves some Ethereum addresses related to TornadoCash, Flashbots stops adding these transactions to the blocks sent to validators. This move has been opposed by Ethereum builders, who believe that the infrastructure level occupied by Flashbot should be completely neutral to avoid making the entire network look like centralized payment processors such as Visa.

Since the merger, the Ethereum community has been working to reduce censorship by configuring MEV-Boost to use non Flashbots relays. Currently, 17.3% of the blocks rely on Flashbots relay to extract MEVs, reducing the review rate to 35%, a huge reversal from the high of 78% in November 2022.

Current pledged tokens have occupied the ETH market

After the merger, liquidity pledge emerged in the Ethereum ecosystem.

Anyone can obtain rewards through pledge and participate in Ethereum's security system, which involves locking ETH tokens in addresses on the Ethereum blockchain to earn stable interest. But there is a problem with this, once tokens are pledged, they cannot be purchased, sold, or used in DeFi (such as as as collateral for loans), which limits the attractiveness of investors who want to maximize returns from their investments.

Mobile pledge services from third parties provide an alternative to traditional pledges. Users who pledge through services such as Lido can obtain a derivative ETH token representing their pledged assets, rather than directly pledging through Ethereum.

This type of liquid token "LST" earns interest like a normal pledged ETH, with the difference being that LST can be used for trading. This is a highly attractive investment for DeFi traders who want to participate in ETH collateral. There is an additional benefit, as LST assumes the pledge risk for users without requiring them to invest 32ETH.

Before the upgrade of Shapella in April 2023, the pledgor was unable to extract the pledged ETH, so users initially turned to liquid collateral to earn pledge proceeds without having to bear unknown risks during the lockdown period. Once the pledged ETH can be extracted, one of Ethereum's main risks is eliminated, but Ethereum's added value is lost. Some people believe that the liquidity pledge market may shrink and instead support traditional pledges, but this is not the case.

At present, the liquidity pledge market is worth nearly $20 billion and is still growing rapidly. This is mainly because LST is ubiquitous in DeFi and is easier to obtain compared to traditional pledges. Lido's token STETH holds the largest share in the LST market, approximately 72.24%.

ETH Net Supply Decreased

The merger has brought some changes to ETH's token economics.

The most noteworthy thing is that this upgrade has caused ETH to experience "deflation" for the first time, which means that the total supply of ETH is decreasing rather than increasing. The circulation of ETH has decreased by 0.24% compared to a year ago. The decrease in supply is partially due to EIP-1559, which was a network upgrade approximately a year before the merger. After the EIP-1559 upgrade started, it began to "burn" some ETHs in each transaction on the network. But it was not until the merger further reduced the issuance speed of new ETHs that ETH experienced net deflation.

As the supply of ETH increases year by year, some investors are concerned that their holdings of ETH will depreciate over time. Some investors hope that deflation will help make ETH more valuable. So far, it is difficult to say whether this situation has occurred. In the months since the merger of Ethereum, the price of Ethereum has not changed much, and macroeconomic factors may have a greater impact in the short term than changes in supply.