Low fees and centralization: Ethereum's first results on PoS
By Artem Khomenko 2580 3 Dec 2022
On September 15, 2022, Ethereum switched from Proof-of-Work to Proof-of-Stake. More than 2 months have passed since the Merge date, so we decided to analyze the first results and predict the future consequences of this move.
Environmentalists can breathe a sigh of relief
According to data analytics and research company Messari, Ethereum's energy usage has decreased by 99.95%. The network has no more miners, and the validator pools are structured as tightly as possible, resulting in near-zero power consumption (compared to the PoW period, of course).
The cost of graphics cards also went down, as the GPU mining of altcoins has become absolutely unprofitable at this point.
Gas fees did go down
The average gas price (the unit of fee measurement) is 11 Gwei at press time. Given the asset price of $1,200, Ethereum transaction fees are currently around $0.25-0.30. The fees are commensurate with those of BSC and Tron, which are key competitors of Ethereum.
The Merge wasn't the only factor affecting the gas fees, though. Due to the general crypto market downturn, the network liquidity went down significantly, along with the prices of cryptocurrencies. Hence, only a bigger time sampling (at least one year long) will allow us to estimate the gas fee rates more accurately.
Censorship, censorship, censorship
According to Labrys' CEO, 45% of validators comply with OFAC transaction and address verification requirements. In other words, any user’s transaction is subject to censorship by the US regulator, who checks whether the wallet complies with sanctions policy, blocks certain services (like Tornado Cash), or tracks possible links to addresses of criminals and scammers.
In November, the figure hit a record 60%. For the average user, this can provoke problems with the use of DeFi services. And globally for the network, it can result in validator block rejections, which will cause a decrease in transaction verification speed and probably entail extra spending on gas to have transactions completed faster.
The validators now include a limited number of companies. According to Ethernodes, 45% of the Ethereum nodes are currently situated in the U.S. and 14% in Germany. Yet, more than half of the staking capacity comes from Amazon, Alibaba, and Google Cloud web services. This helps usurp the network and enhances centralized blockchain administration.
The likelihood of a 51% Attack is not greatly affected because its implementation requires the concentration of most network’s hashrate under one entity. However, it does lead to increased control of the blockchain and potentially facilitates the potential for third-party influence.
Is the ETH supply set to decline?
Last year, Ethereum introduced the burning of a certain portion of ETH in each block. The innovation was intended to reduce the coin's inflation. However, the Merge could cause the amount of ETH burned to exceed the amount of ETH issued. According to Ultrasound.money, ETH has become a deflationary asset. The PoW inflation forecast was above 3% per year, the PoS has brought that figure into negative territory, and is now -0.012%.
The network is now burning more ETH than what's being minted. And that's in the face of reduced activity within the network. Increased trading volumes and overall liquidity must increase the number of coins burned per transaction, which could accelerate the rate of reduction in ETH supply.
How all this will affect the ETH price in the future remains to be seen. For now, we can conclude that the Merge has succeeded in network scalability at the cost of decentralization. However, this does not affect the developers' desire to use Ethereum, and the number of projects on the network itself and Layer 2 is constantly growing.