Ethereum is the second largest cryptocurrency in the world in terms of market capitalization, meaning there’s a large number of investors looking to add ETH to their portfolios. So far, 2023 has brought in many changes for the ecosystem and definitively changed it from how it used to be.
But what exactly are the changes, and how did they affect ETH price and engagement? In this article, we will be going into all of these to help you see how digital currency has transitioned in the year.
The Switch to Proof-of-Stake
Recently, Ethereum made a switch to the proof-of-stake protocol to replace the earlier, more energy-intensive proof-of-work one. This switch is arguably the most noteworthy change that occurred on the Ethereum blockchain.
The last phase of the switch, which is known as the Merge, was executed on September 15, 2022. The most important aspect of this shift was that it reduced energy consumption levels by roughly 99.95%.
Energy usage has long been a hotly debated topic in the cryptocurrency world, with many climate activists discussing their concerns about the sizable carbon footprint resulting from mining. That is the process necessary to create new coins and validate transactions.
With the merger changing the consensus mechanism, the entire process becomes instantly more sustainable. Before the introduction of the merger, the overall energy footprint of the Ethereum footprint was approximately the same as that of a small country.
Although other blockchains continue to use proof-of-work systems, Ethereum has stepped aside from that, succeeding in dropping the emissions associated with its processes.
The Introduction of Stakes
Staking has become one of the most visible parts of the Ethereum trading experience following the introduction of the Shanghai upgrade in April. For the first time, validators were allowed to withdraw their staked coins that had been locked inside the network for a long time.
Many were concerned about adding this functionality, believing that it would disrupt pricing and cause irreparable damage to the grid.
In order to stake on the Ethereum blockchain, a validator has to lock up 32 coins in the network, the rough equivalent of $50,000. These funds later earn steady interest that can nevertheless be removed if a validator makes a mistake.
The expenses and technicalities associated with the staking process have created the necessity for an intermediary service. Companies, exchanges, and collectives have started allowing users to pool all their Ether coins together to amass the thirty-two they require.
Later, the intermediary entities stake on behalf of the users and take a part of the rewards they are owed due to their services of operating a validator.
However, staking has been the center of controversy due to the use of go-betweens. Many consider that this is directly contradictory to the cryptocurrency policy for decentralization. A small number of the intermediaries, perhaps even only one, could potentially gain access to a disproportionate amount of information and, therefore, gain control over the network and individual blocks.
Liquid staking tokens
Also known as liquid staking derivatives, these assets are fundamentally blockchain receipts that prove you own a particular staked holding. Their value is pegged to that of the initial investments as well.
Third parties offer liquid staking services and are an alternative to traditional staking practices. The users who use intermediary platforms instead of staking directly with the Ethereum blockchain can earn a sort of derivative token representing their LSTs.
These assets can earn interest in the same way as other asset classes and can be sold or bought like any other cryptocurrency. This makes them a highly appealing choice for decentralized finance traders who are looking for exposure to Ethereum staking. Liquid staking tokens allow you to begin staking coins without the need for the initial 32 coins.
In the days before the Shapella, withdrawing staked currency was impossible for users. This pitfall indirectly fostered the development of liquid staking tokens, as investors wanted to get the staking yields without risking the possibility of locking their tokens for an unspecified time.
Currently, the market is estimated at $20 billion and is continuously growing. LSTs are easily accessible compared to standard staking since you don’t have to worry about additional expenses.
Decrease in Supply
The Merge has also made Ethereum deflationary for the first time in its history. Since the change of the consensus mechanism, roughly 700,000 coins were minted, with over 980,000 burned. This caused a net supply reduction of somewhere around 299,922 Ether, according to recent analytics.
Annually, that signifies a supply decrease of 0.249%. If Ethereum had continued to operate as a proof-of-work blockchain, the net supply would have increased by 3% or more than 3.8 million coins.
The proof-of-stake system no longer needs participants to solve complex problems in exchange for rewards. The transition, consequently, removed a sizable portion of miners from the marketplace. The PoS system also burns through transaction fees.
While validators receive the top payments that users add to prioritize their transactions and increase speed, the base sum is burned. These actions directly remove Ether coins from circulation.
As a result, ETH has become deflationary. This is good news for investors. In the past, many were concerned that the continuous growth would mean their supply would devalue over time, resulting in capital loss.
As a result, many look forward to deflation having the opposite effect and making their holdings more valuable. So far, this hasn’t happened, and it might still be a while until this effect swings into full force.
The Bottom Line
Despite all the troubles it encountered, Ethereum remains a favorite among investors. If you plan to buy Ethereum, it’s essential to note that macroeconomic factors have consistently kept prices low, which had a natural impact on the development of the market.
However, it’s important to remember that crypto has navigated difficult situations in the past and always emerged more robust than ever before.
This should reassure the investors who aren’t convinced whether or not their portfolios will suffer losses. As always, remaining cautious before buying, selling, or trading is vital.