After the implementation of EIP-1559, the total supply of ETH decreased by approximately 300,000.

It’s been a year since The Merge, a landmark upgrade that brought Ethereum into the Proof-of-Stake (PoS) era and fundamentally redefined the security and economics of the Ethereum network.

However, the merger is not the end goal for Ethereum. Instead, it lays the foundation for the evolution and future development of the Ethereum network, bringing together tighter economic security and paving the way for greater inclusion of the L2 scaling paradigm. In this article, we revisit predictions made about Ethereum’s now-defunct mining operations, examine key network data to help us understand how Ethereum’s PoS ecosystem continues to evolve, and think about new directions and future upgrades being researched.

The Fall of Ethereum Miners

In the twilight age of Ethereum’s proof-of-work (PoW), the end of mining is undoubtedly one of the most impactful results of the merger. At its peak in May 2022, the Ethereum network’s hashrate exceeded 1,000 TH/s. This is not surprising, as Ethereum mining is a multi-billion dollar industry, generating more than $2 billion in revenue per quarter and more than $40 billion in cumulative revenue, of which $30 billion comes from block rewards and $11.3 billion from transaction fees.

However, with the merger and Ethereum’s transition to Proof of Stake, this all came to an end. Last September, we discussed the prospect of the merger having a knock-on effect on GPU miners and prices, predicting a drop in hardware prices and a bleak outlook for GPU miners.

Unlike Bitcoin ASICs (specialized hardware), Ethereum is "mined" using GPUs, which are general-purpose devices that can also be applied to gaming, video editing, graphic design, 3D animation, CAD, and (more recently) AI acceleration. As we explained last year, ETH miners lack relatively profitable options. While some large, industrial-scale miners with higher-quality chips have been able to seamlessly jump to the new AI-driven gold rush of computing resources, this has proven to be the exception, and most small miners still have limited options.

Other GPU-mineable PoW chains, such as Ethereum Classic (ETC) or ETHPoW, have much less on-chain activity and applications than ETH, lack the need for instant transaction inclusion, thus lower fees, and lack MEV infrastructure. For example, the decoupling trend of ETC's hash rate and price highlights the declining appeal of this alternative, and although the surge in combined hash rate suggests that miners flocking to the network are unlikely to break even and make a profit.

Ethereum validator landscape

Since the merger, validators have become the main driving force of the Ethereum network. Therefore, if we want to assess the health of Ethereum in the proof-of-stake paradigm, it is crucial to understand the validator ecosystem and its evolution.

One of the things worth noting is that the largest validator pool to date is under the Lido umbrella, which currently accounts for 30.6% of the total number of active validators (787,755). After the Shapella upgrade opened beacon chain withdrawals in April this year, a wave of new validators poured into Ethereum.

Liquidity staking has been one of the most popular ways to participate in Ethereum staking for individuals who are unwilling to stake independently — either due to a lack of funds to stake a total of 32 ETH, a lack of technical knowledge or unwillingness to run their own node, or simply because they want to keep those funds liquid rather than locked up in staking. Lido’s staked ETH derivative (stETH) is also one of the most important collateral assets, providing economic utility to the staked ETH in addition to securing the network.

However, Lido’s pre-eminent position in the staking ecosystem is not without controversy. Large groups of stakeholders under the control of a single entity are seriously problematic. This is because, in principle, they could be exploited by malicious actors to launch attacks, including time bandit attacks and other coordination attacks. However, this impression is exacerbated by the belief that Lido is a single entity, when in fact it is made up of multiple staking operators who run nodes independently, while also providing additional protection against coordination attacks.

From the above graph, we can see that Lido stakers are evenly distributed across different node operators. This further demonstrates that Lido is not centralized in nature, but rather consists of many different parties, with no single node operator holding more than 5% of the Lido validator pool. Additionally, Lido’s node operator allocation is capped at a maximum value set by the Lido governance mechanism, allowing users to track and decide whether to allow individual node operators to operate above a certain threshold. However, such a large provider could introduce new risks to the still nascent staking ecosystem. This will be a topic of ongoing debate as Ethereum continues to grow.

Validator Profitability and Ethereum’s Monetary Policy

It is critical to the security of the network that the agents responsible for securing and processing transactions are economically sustainable. However, as new validators join the network, each validator's earnings decrease as revenue is shared among all validators. Predictable revenue streams for validators have been decreasing over the past year, with only a small bump in April when withdrawals were enabled. On the other hand, the earnings that validators receive are variable and a function of user demand and network activity. Priority fees have contributed approximately 0.7% to 0.9% to the average validator's earnings over the past few months.

Following the implementation of EIP-1559, a base fee burn mechanism was introduced whereby a portion of the fees paid to validators are now destroyed, completely removed from circulation. Therefore, while validators still receive priority fees and also receive newly issued ETH as a reward for performing validator duties, there is a delicate balance to consider when assessing whether the Ethereum network as a whole is inflationary or deflationary. As shown in the chart below, while Ethereum has been deflationary for much of the past year since the merge, it has recently been inflationary due to lower user activity on the network. Overall, Ethereum's supply has decreased by about 300,000 ETH, or about -0.25% per year.

Ethereum Roadmap

Despite Ethereum’s many successes to date, users and developers alike expect much more from it than what it currently has. It has long been hoped that billions of people will be able to transact and develop decentralized applications on the platform. However, the journey to achieving this grand vision is paved with a series of additional technical upgrades. These upgrades may be highly technical in nature, but they have clear goals.

Despite the recent trend toward lower fees, Ethereum’s Layer 1 (L1) fees remain a barrier for high-frequency, low-value transactions. Average transaction fees have hovered around $4 over the past month. While such fees may be negligible for million-dollar stablecoin transfers, they become a significant barrier for gaming, micropayments, and mainstream consumer-facing applications. The need for a more affordable fee structure is a persistent concern.

At the heart of Ethereum’s current scalability strategy is a “Rollup-centric roadmap.” This path emphasizes the use of Rollups (a layer 2 scaling solution) to enhance the network’s throughput. The upcoming EIP-4844 (also known as “Proto-Danksharding”) provides a dedicated “blob” data space and a unique fee market tailored for Rollup data. This upgrade is expected to reshape the fee landscape, especially with the current attention paid to Rollup solutions such as Arbitrum, Optimism, and Coinbase’s newly launched Base chain.

Meanwhile, Ethereum is not only scaling in terms of transaction capacity, but also refining the user experience. Account abstraction is another upcoming upgrade that promises to simplify the daunting task of managing mnemonics and private keys. By making these crypto necessities more user-friendly, Ethereum aims to lower the barrier to entry for the average user, potentially ushering in a new wave of adoption and attracting new use cases.

From an analytical perspective, these developments are not only technical milestones, but also introduce new dimensions for fundamentally evaluating Ethereum. For example, EIP-4844 will affect fee market economics, and the subsequent reduction in fees for layer 2 solutions will require a recalibration of cost analysis as well as the economics of Rollup operators. In addition, the rise of smart contract wallets may change traditional adoption metrics, forcing analysts to seek new on-chain metrics.

Following the habit of naming execution layer upgrades after cities, the upcoming upgrade is called "Cancun". The EIP-4844 upgrade is not the only improvement in the Cancun upgrade. Other EIPs include

EIP-1153, which aims to reduce the cost of storing data on-chain and improve block space;

EIP-4788, which aims to improve the design of cross-chain bridges and stake pools;

EIP-5656, which adds minor code changes related to the Ethereum Virtual Machine;

EIP-6780 aims to improve contract security by eliminating code that could terminate smart contracts.

As of today, developers are busy testing early versions of each improvement proposal, and there is no confirmed release date for these upgrades. The Cancun upgrade will occur at the execution layer where all protocol rules reside, while the consensus layer, which validates blocks, will be upgraded via the "Deneb" fork. The name "Dencun" is a combination of the names of these simultaneous upgrades.

in conclusion

As Ethereum continues to grow, it is moving towards its vision of enabling billions of users to transact and develop decentralized applications on the platform. We have spent a year evaluating the impact of the changes to Proof of Stake on the network, including Shapella withdrawals, Lido’s dominance in staking, validator rewards, and Ethereum’s overall stability in the face of these profound changes. With so many important upgrades on the horizon and the potential to greatly improve L2 scalability scenarios, it’s important for us to keep an eye on it.

【Disclaimer】The market is risky, so be cautious when investing. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions in this article are suitable for their specific circumstances. Investing based on this information is at your own risk.