Today marks the first anniversary of “The Merge,” Ethereum’s transition from Proof-of-Work, a computation-heavy security model, to a pledged capital security framework, Proof-of-Stake (PoS). The past year has been defined by developments in Ethereum’s scalability roadmap and—more recently—news around filings for several ETH futures ETFs in the US. Here we share five charts that demonstrate how Ethereum has evolved over the past year and how the investment case for its token ETH is strengthening.

 

1. The number of active validators¹ on Ethereum has increased by 85% since The Merge².

Description
Now, ~790,000 validators are active on the network, against ~427,000 when the switch to PoS took place (an 85% increase). 

 Why does it matter?
These players have now more than $40 billion³ in capital locked for security purposes on the network (way above any other smart contracts platform in crypto²), significantly diminishing major threats to Ethereum’s security due to the high capital cost of taking over a majority stake on the network.

 

2. The share of transaction fees in validator income is above 20% even during the bear market⁵.

Description

With the removal of mining after the switch to PoS, Ethereum has drastically decreased its energy consumption and also significantly reduced the issuance of new ETH as a reward to active validators. 

Why does it matter?

As a consequence, immediately after the upgrade, the share of transaction fees as a percentage of validator income was brought back up above the 20% threshold, a level only previously seen in the 2020-2021 bull run. As a new crypto cycle approaches, and on-chain activity ramps back up, this reduced reliance on ETH issuance to incentivize validators will most likely continue to take place, consolidating Ethereum as the first profitable blockchain in the crypto space and making ETH a sustainable native token.

 

3. Staking interest increased by 260% after Shanghai activated withdrawals.⁶

 

Description

The Shanghai upgrade, which was successfully activated in April of this year and enabled ETH withdrawals, concluded Ethereum’s transition to Proof-of-Stake and brought a lot more predictability for ETH investors to start engaging with staking.

 Why does it matter?

This reassured confidence led to the number of daily deposits by stakers⁷ increasing from an average of ~20,000 ETH per day before Shanghai to ~72,000 ETH on a daily basis after the upgrade. This whopping 260% rise shows that, after the significant derisking coming from the successful activations of The Merge and Shanghai, investors are steadily becoming more interested in providing security to Ethereum in exchange for “crypto’s risk free-rate,” that is, an interest rate paid to stakers in ETH—the native token of the most consolidated smart contracts platform in crypto—which, rather than relying on a decentralized application and this potentially incurring additional smart contract risk, is solely due to security provision of the blockchain itself.

 

4. Total stake as a percentage of the ETH supply has surpassed 20%.⁸

 

Description

The ramp-up in staking interest after Shanghai led the stake on Ethereum to recently surpass 20% of the total ETH supply, implying that 1 out of every 5 ETH in existence is now pledged as collateral by stakers for security purposes. 

 Why does it matter?

This trend is likely to continue until the stake ratio as a percentage of total supply falls within the range from 30% to 50% akin to other PoS networks. With less of the ETH supply staying liquid while demand for ETH continues to grow as users interact with decentralized applications on the network, price appreciation for ETH is likely to be expected.

 

5. ETH was net deflationary in the four quarters following the switch to PoS.⁹

Description

The drastic reduction in issuance after the switch to PoS, together with the existing burning mechanism for ETH (which subtracts from the total supply part of the ETH paid in transaction fees on the network), has led Ethereum to be net deflationary in the four quarters following “The Merge.” 

 Why does it matter?

This leads to an additional scarcity driver for ETH, and, similar to tokens locked on stake, can potentially drive prices higher as demand for the token grows with the dawn of a new bull cycle.

 

Conclusion

The Merge was a major milestone for Ethereum, and it is still too early to say what its long-term impact will be. However, the positive trends seen in the past year are encouraging.

One year after its transition to Proof-of-Stake, Ethereum is showing strong signs of progress. The number of active validators has increased by 85%, and the share of transaction fees in validator income is above 20% even during the bear market. Staking interest has increased by 260% after the Shanghai upgrade, and total stake as a percentage of the ETH supply has surpassed 20%. Finally, ETH has been net deflationary in the four quarters following the switch to PoS.

 These metrics suggest that Ethereum is becoming more secure, decentralized, and sustainable. As the crypto market recovers and on-chain activity ramps back up, Ethereum is well-positioned to continue to grow and thrive.

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_{¹Network participants that are proposing and attesting to blocks at a specific point in time.}

_{²Hashdex Research with data from beaconcha.in (accessed September 14, 2023).}

_{³According to https://www.stakingrewards.com/ (accessed September 14, 2023).}

_{⁴Validator revenue in every block consists of newly issued ETH and part of the transaction fees paid by users that had their transactions included in that block.}

_{⁵Hashdex Research with data from Etherscan and beaconcha.in (accessed September 14, 2023).}

_{⁶Hashdex Research with data from Etherscan (accessed September 14, 2023).}

_{⁷ETH holders that deposit capital to start participating in block validation.}

_{⁸Hashdex Research with data from beaconcha.in (accessed September 14, 2023).}

_{⁹Hashdex Research with data from Etherscan and CryptoQuant (accessed September 14, 2023). *Q3’23 is not complete as of this analysis.}

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