One Year After Ethereum's Merge: Total Supply Decreases by 300,000 ETH

Dive into the comprehensive analysis of Ethereum a year after its crucial 'Merge' upgrade.

Learn how the switch from a PoW to a PoS mechanism has resulted in a reduced total supply of 300,000 ETH and what experts predict for the upcoming EIP-4844.

Find out if Ethereum's best days are yet to come or if they're riskier than ever.

A Pivotal Upgrade in Ethereum’s Consensus Mechanism

On September 15, 2022, Ethereum executed a crucial upgrade called "Merge," transitioning from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism. This upgrade has fundamentally changed the largest smart contract blockchain.

According to Ethereum's analytical dashboard ultrasound.money, since the Merge, Ethereum has minted 684,455.31 ETH and burned 983,377.87 ETH, resulting in a net supply reduction of 299,922.50 ETH.

When annualized, this corresponds to a 0.249% decrease in total supply. If Ethereum had continued to operate under PoW, the net supply would have increased by over 3,800,000 ETH or 3%.

Proof-of-Stake vs. Proof-of-Work: The Economic Shift

In the PoS mechanism, market participants are required to hold ETH in order to verify transactions in exchange for rewards.

Under the previous PoW system, miners solved computational problems to record transactions in exchange for rewards. The transition to PoS has led to a significant number of miners exiting the market.

Importantly, the PoS mechanism also burns a part of the transaction fees paid by users. Validators receive a priority fee, which is an additional amount on top of the base fee that users pay to prioritize their transactions.

Meanwhile, the base fee gets burned, reducing the circulating supply of ETH.

Ethereum's Environmental and Financial Landscape After The Merge

The Merge has transformed Ethereum into a deflationary asset while making it a more eco-friendly cryptocurrency. However, the current ETH price stands at around $1,630, showing little change since the Merge.

This suggests that the upgrade failed to significantly boost Ethereum's market value, especially when compared to Bitcoin, which has risen nearly 30% in the past 12 months.

Expert Insights and Future Upgrades

Markus Thielen, the Head of Research Strategy at Matrixport, a cryptocurrency service provider, stated, "Ethereum warned users that the upcoming 'Paris' upgrade wouldn’t reduce gas fees, leading to a price decline and ETH falling behind Bitcoin.

However, this also indicates a potential trigger for reduced gas fees in the future." Thielen added, "The next upgrade called EIP-4844, aimed at reducing gas fees, seems to be a crucial missing component right now."

The upcoming Ethereum Improvement Proposal (EIP)-4844, or "Proto-Dunksharding," aims to reduce gas fees and increase transaction throughput by introducing data blobs.

These blobs contain large volumes of data but are not permanently stored on Ethereum's Virtual Machine, improving blockchain efficiency.

This upgrade is scheduled for the latter half of this year. "While Ethereum may be 'down,' it’s certainly not 'out,' and investors should closely monitor the positive news flow around EIP-4844.

However, much is at risk. If this upgrade is seen as minimalistic, the best days for Ethereum could be delayed," concluded Thielen.