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- Ethereum’s transition to Proof-of-Stake is being questioned per value proposition.
- The shift from Proof-of-Work might have cost the network $1 trillion in value.
In a major development, Meltem Demirors, Chief Strategy Officer of CoinShares, stated that Ethereum’s pivot to Proof of Stake (PoS) in 2022 was costly.
In 2022, the Ethereum conversion to PoS dramatically reduced energy consumption by over 99%. Notably, ETH’s consistent market volatility raises issues about its long-term impact on the network’s value and stability.
The Impact of Ethereum’s Shift
According to Meltem Demirors, PoS weakened the Ethereum core network by enabling the rapid expansion of Layer-2 scaling solutions. According to her, these L2s now process a significant share of transactions.
She believes the network lost a $1 trillion growth opportunity by abandoning Proof of Work (PoW). This has ultimately diluted the Ethereum Layer-1 ecosystem instead of strengthening it. For her, had ETH stayed on PoW, it could have created a solid energy-computation infrastructure that would make it rival Bitcoin side-by-side.
She pointed out that it could have also allowed for strategic innovation in GPU computing, similar to Bitcoin mining advanced hardware development.
Similarly, Ethereum’s economic viability is drawing mixed market reactions. When developers introduced PoS, Ethereum came off as ultra-sound money. This positioning is due to mechanisms like EIP-1559, which burns a portion of transaction fees.
ETH achieved near-zero net issuance for a time, reinforcing its deflationary narrative. However, data from Ultrasound Money now shows that Ethereum is in its longest inflationary period since The Merge. The network currently issues 943,000 ETH annually while burning just 27,000 ETH.
At an annual inflation rate of 0.76%, Ethereum’s earlier deflationary claims are being challenged.
CryptoQuant analysts caution that Ethereum may never become deflationary again without significantly higher network activity. Notably, this has weakened its long-term store-of-value argument.
As we mentioned in our earlier news brief, Justin Drake posited that through the much-anticipated Pectra Upgrade, Ethereum would have to decrease its issuance or increase its token burn to restore its status as ultrasound money.
Debating Ethereum’s True Purpose
It is worth mentioning that Ethereum’s broader vision has also come under scrutiny. Peter Szilágyi, a key Ethereum developer, recently stated that ETH was never designed to be money. Instead, it was meant to power a decentralized ecosystem.
This contradicts narratives that positioned ETH as a superior alternative to Bitcoin in terms of scarcity and value retention. Critics argue that a lack of clear positioning could affect Ethereum’s long-term appeal.
Despite these concerns, some industry leaders see benefits in PoS. Vince Yang, CEO of zkLink, pointed out that Ethereum’s scaling activity is at an all-time high, with transaction speeds doubling in recent months due to lower gas fees.
One avenue to enhance Ethereum’s functionality is the Pectra upgrade. As we covered in our latest report, the Ethereum Pectra upgrade went live on the Sepolia testnet but encountered errors exacerbated by an attacker’s activities.
However, Ethereum developers have introduced the ‘Hoodi’ testnet to further refine Pectra’s innovations. All the arguments have weighed down ETH’s price outlook thus far. As of this writing, ETH is trading at $1,967.42, down over 1.4% in the past 24 hours.
