Three years ago, on September 15, 2022, Ethereum underwent a transformative shift known as The Merge, abandoning energy-intensive proof-of-work (PoW) mining for a proof-of-stake (PoS) consensus mechanism.
This pivotal upgrade not only reshaped Ethereum’s blockchain architecture but also redefined its economic model, creating new opportunities for investors. Over the past three years, Ethereum’s economy has evolved significantly, with increased staking participation, a booming liquid staking market, and a growing perception of ETH as both a growth asset and a source of passive income akin to traditional financial instruments.
Here’s how Ethereum’s economics and its role for investors have changed since The Merge.
From Mining to Staking: A Fundamental Shift
The Merge marked Ethereum’s transition from PoW, where miners used computational power to validate transactions, to PoS, where validators stake ETH to secure the network. This shift slashed Ethereum’s energy consumption by over 99.9%, addressing environmental concerns and aligning with global sustainability trends.
More importantly, it introduced a new economic model where validators earn rewards for locking up ETH, fundamentally altering how participants engage with the network.
Unlike mining, which required significant hardware investments, staking allows anyone with 32 ETH (or less through staking pools) to participate in securing the blockchain and earn rewards. These rewards, paid in newly minted ETH, typically yield 3-5% annually, depending on network conditions.
This predictable income stream has transformed Ethereum into a yield-generating asset, appealing to a broader range of investors, from retail to institutional.
Staking Boom: 30% of ETH Supply Locked
Since The Merge, Ethereum’s staking ecosystem has grown dramatically. As of today, nearly 30% of the total ETH supply - over 36 million ETH, worth tens of billions of dollars - is staked, securing the network through more than 1.1 million validators. This is a sharp increase from the 10% staked at the time of The Merge, driven by rising confidence in Ethereum’s PoS model and the introduction of staking-friendly upgrades.
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The Shapella upgrade in April 2023 was a game-changer, enabling staked ETH withdrawals for the first time. This reduced the perceived risk of staking, as validators could now access their funds without indefinite lockups, leading to a surge in participation.
Platforms like Lido Finance, which holds a significant share of staked ETH, have further democratized access by allowing users to stake as little as 0.01 ETH through liquid staking protocols. These protocols issue derivative tokens (e.g., stETH) that represent staked ETH, enabling users to trade or use their assets in DeFi while still earning staking rewards.
Liquid Staking: A Multibillion-Dollar Market
The rise of liquid staking has been one of the most significant developments in Ethereum’s post-Merge economy. Protocols like Lido, Rocket Pool, and Ankr have created a multibillion-dollar market by offering flexibility to stakers.
Liquid staking tokens can be used as collateral in DeFi, traded on exchanges, or held for additional yield, blending the benefits of staking with liquidity. Lido alone accounts for over 30% of all staked ETH, highlighting the scale of this trend.
This innovation has made Ethereum more attractive to investors seeking both capital appreciation and income. Liquid staking has also drawn institutional interest, with firms like Coinbase and Binance integrating these services into their platforms. The ability to earn staking rewards while maintaining asset flexibility has positioned ETH as a hybrid investment, combining the growth potential of a cryptocurrency with the stability of a dividend-paying asset.
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Ethereum as a Yield-Generating Asset
The Merge fundamentally changed Ethereum’s value proposition for investors. Previously, ETH was primarily a speculative asset tied to Ethereum’s role as the backbone of decentralized applications (dApps) and smart contracts. Post-Merge, ETH has become a source of passive income, drawing comparisons to bonds or dividend stocks. The 3-5% annual staking yield, while variable based on network activity, offers a compelling return in a low-interest-rate environment, especially for institutional investors.
Major funds and publicly traded companies now hold billions of dollars in ETH on their balance sheets, viewing it as a dual-purpose asset: a hedge against inflation and a source of consistent returns. For instance, firms like Grayscale and Ark Invest have increased their Ethereum allocations, citing its growing utility and staking rewards.
The approval of Ethereum spot ETFs in the U.S. has further fueled institutional adoption, providing a regulated vehicle for exposure to ETH’s price appreciation and staking yields.
Economic Impacts: Deflation and Scarcity
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The Merge also introduced a deflationary mechanism to Ethereum’s economy. Under PoW, miners sold newly minted ETH to cover costs, creating sell pressure.
In PoS, staking rewards are lower, and Ethereum’s EIP-1559 upgrade burns a portion of transaction fees, reducing the net issuance of ETH. In periods of high network activity, more ETH is burned than issued, making the asset deflationary.
Since The Merge, Ethereum’s supply has grown at a slower rate, and in some months, it has contracted, enhancing ETH’s scarcity and appealing to investors betting on long-term value appreciation.
This deflationary dynamic, combined with staking rewards, has made ETH a unique asset class. Investors now see Ethereum as a network with built-in economic incentives, where holding and staking ETH aligns with the network’s growth and security.
Challenges and Risks
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Despite its success, Ethereum’s post-Merge economy faces challenges. The concentration of staked ETH in protocols like Lido raises concerns about centralization, as a few entities control a significant portion of validators.
This could pose risks to network security and decentralization, core tenets of Ethereum’s ethos. Additionally, staking yields fluctuate based on network demand, and periods of low transaction activity could reduce returns, impacting investor expectations.
Regulatory uncertainty also looms, particularly for liquid staking protocols, which could face scrutiny as securities in some jurisdictions.
Finally, Ethereum must continue to scale through upgrades like sharding to maintain its edge over competitors like Solana and Binance Smart Chain, which offer lower fees and faster transactions.
Ethereum’s New Role for Investors
Three years after The Merge, Ethereum has solidified its position as a cornerstone of the crypto economy and a compelling investment. The shift to staking has created a sustainable, yield-generating model that appeals to retail and institutional investors alike. With nearly 30% of ETH staked, a thriving liquid staking market, and a deflationary supply dynamic, Ethereum is no longer just a platform for dApps but a financial ecosystem with real-world utility.
For investors, ETH offers a rare combination of growth potential and passive income, backed by a network that powers DeFi, NFTs, and emerging AI applications. As Ethereum continues to evolve, its role as a hybrid asset—part tech investment, part income generator - positions it as a cornerstone of modern portfolios. The Merge was just the beginning; Ethereum’s economic transformation is redefining what it means to invest in crypto.
