It has been a full year since Ethereum successfully completed The Merge, transitioning to a Proof-of-Stake (PoS) consensus mechanism. Over the past 12 months, the network has demonstrated remarkable reliability and resilience under its new system.
This transition has not only altered Ethereum’s supply dynamics, pushing it into a deflationary era, but also accelerated developments in key areas like Layer2 scaling solutions. At the same time, growing interest from institutional and corporate players has introduced new momentum and narratives around the world’s second-largest blockchain.
Understanding Ethereum’s Shift to Deflation
Since The Merge, new ETH issuance comes solely from staking rewards in the PoS system. Based on current data, Ethereum’s annual issuance is estimated at around 660,000 ETH.
Data from ultrasound.money indicates that over 300,000 ETH have been burned since the transition, worth approximately $500 million at current prices. The total number of ETH burned has exceeded 3.58 million.
What’s particularly noteworthy is that Ethereum has entered a deflationary phase with an annualized deflation rate of around -0.26%. In comparison, Bitcoin’s current inflation rate sits at 1.716%.
Had Ethereum remained on Proof-of-Work, its inflation rate would have been nearly double that of Bitcoin, at approximately 3.162%. This clearly highlights the profound impact of the PoS shift on ETH’s supply economics.
These deflationary effects are occurring even amid reduced on-chain activity and lower ETH burn rates. Recent market conditions have pushed daily ETH burn to between 1,000 and 2,000 tokens. During periods of high network usage, daily burn has reached 4,000–5,000 ETH, suggesting significantly stronger deflationary pressure could return with renewed activity.
Staking adoption has also climbed steadily. Over 24 million ETH are now staked, valued at nearly $396 billion and representing almost 20% of the total supply. This is a substantial increase from the 13% staking rate one year ago, further enhancing ETH’s scarcity.
Compared to other major proof-of-stake blockchains, which often see staking ratios between 60% and 80%, Ethereum still has considerable room for growth in this area.
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The Rising Dominance of Layer2 Solutions
Layer2 scaling solutions have become the central innovation frontier within the Ethereum ecosystem. The total value locked (TVL) across all L2 networks has approached $10 billion, nearing its historical high.
Modular development stacks like OP Stack, Arbitrum Orbit, and ZK Stack are gaining significant traction. By leveraging Ethereum’s established network effects and EVM compatibility, these solutions are increasingly overshadowing the narratives of competing Layer1 blockchains.
In the past, developers faced a relatively straightforward choice among Ethereum, Solana, Cosmos, or other Layer1s. Today, the expanding L2 landscape offers a richer set of options, often at the expense of alternative smart contract platforms.
The upcoming Dencun upgrade is expected to reduce Layer2 transaction costs by an order of magnitude, unlocking new use cases and greatly improving user experience. High gas fees on Ethereum mainnet—often ranging from $1 to $20 per operation—have been a barrier to practical adoption. More complex applications, such as those in the derivatives space, became prohibitively expensive for ordinary users.
With lower costs post-upgrade, Layer2 networks will likely support more sophisticated applications, including those in synthetic assets and decentralized finance (DeFi), which require high-frequency contract interactions.
New Developments and Institutional Adoption
Another significant, though sometimes overlooked, narrative is the introduction of PayPal’s dollar-backed stablecoin, PYUSD, issued on the Ethereum blockchain. As a major traditional payments giant, PayPal’s move into stablecoins has drawn considerable attention from both the crypto community and regulators.
The launch of PYUSD represents a long-term positive for the cryptocurrency market and reinforces Ethereum’s role as a global settlement layer. As of this writing, PYUSD has been listed on platforms like Coinbase and Kraken, though its circulation remains modest at around 44.37 million tokens, with just 452 holding addresses. Whether it can challenge Tether’s dominance remains to be seen.
On the regulatory and traditional finance front, the SEC is preparing to approve Ethereum futures ETFs, according to Bloomberg. Nearly a dozen firms, including Volatility Shares, Bitwise, and ProShares, have filed applications. This follows a pattern seen in Bitcoin products, where futures-based ETFs gained approval ahead of spot versions.
Such developments signal Ethereum’s growing acceptance within conventional financial markets. As Vitalik Buterin has pointed out, the next decade is critical for blockchain technology to prove its utility. With scaling solutions improving and institutional interest rising, Ethereum appears well-positioned for future growth.
Frequently Asked Questions
What does it mean that Ethereum is deflationary?
Ethereum becomes deflationary when more ETH is burned through transaction fees than is issued through new staking rewards. This reduces the total supply over time, potentially increasing the value of each remaining token.
How does staking affect ETH's value?
Staking locks up portions of the ETH supply, reducing sell pressure and increasing scarcity. A higher staking ratio typically supports price stability and long-term valuation.
What is the significance of the Dencun upgrade?
The Dencun upgrade introduces proto-danksharding, which drastically reduces Layer2 transaction costs. This enables more scalable applications and improves user experience across the ecosystem.
Can PYUSD rival USDT or USDC?
While PYUSD has the backing of a major financial brand, it still has a long way to go in terms of adoption. Its success will depend on regulatory clarity, market trust, and integration within the crypto and traditional finance ecosystems.
Why are Ethereum futures ETFs important?
They provide traditional investors with regulated exposure to Ethereum without direct ownership. This bridges traditional finance with crypto, potentially increasing liquidity and institutional participation.
What are the risks of Ethereum's PoS model?
Potential risks include centralization of staking, regulatory challenges, and technical vulnerabilities. However, the network has so far proven robust under the new consensus mechanism.