The Merge—one of the most significant upgrades in blockchain history—officially completed just over a year ago, marking Ethereum’s full transition from proof-of-work (PoW) to proof-of-stake (PoS). This pivotal shift didn’t just reduce Ethereum’s energy consumption by over 99%; it fundamentally reshaped the network’s economic model, governance structure, and long-term trajectory.
As we reflect on this milestone, a clear trend emerges: Ethereum is now a deflationary asset, with structural advantages amplified by Layer2 innovation, rising institutional interest, and growing real-world utility. But what does this mean for developers, investors, and the broader crypto ecosystem?
Let’s break down the key developments shaping Ethereum’s evolution since The Merge.
Ethereum Enters the Deflationary Era
One of the most profound impacts of The Merge has been its effect on Ethereum’s supply dynamics. Under PoW, new ETH was continuously minted as block rewards, leading to inflationary pressure. Today, under PoS, issuance is drastically reduced—and often outweighed by token burns.
👉 Discover how Ethereum's deflationary mechanics could reshape digital asset value
Currently, PoS staking generates approximately 660,000 new ETH per year—a fraction of what PoW once produced. Meanwhile, network activity triggers ETH burns through EIP-1559, removing tokens from circulation with every transaction.
According to data from ultrasound.money, Ethereum has already seen over 300,000 ETH removed from circulation since The Merge—equivalent to roughly $500 million at current prices. Total ETH burned has surpassed 3.58 million, reinforcing a structural shift toward scarcity.
More telling? The annualized inflation rate for Ethereum now stands at -0.26%, meaning the network is officially deflationary. In contrast, Bitcoin continues to inflate at about 1.716% annually.
Had Ethereum remained on PoW, its inflation rate would have hovered near 3.162%, nearly double Bitcoin’s. This stark difference underscores how The Merge transformed ETH from an inflation-prone asset into one with built-in scarcity—increasing its appeal as a store of value.
Even more encouraging: these deflationary trends are occurring during a period of relatively low on-chain activity. Daily ETH burn rates currently range between 1,000 and 2,000 ETH, well below historical highs of 4,000–5,000 ETH seen during peak DeFi summers.
As market sentiment improves and user engagement rebounds, burn rates could surge—potentially accelerating deflation and tightening supply even further.
Staking Growth Amplifies Scarcity
Another critical factor is the rapid rise in staked ETH. As of now, over 24 million ETH—nearly 20% of the total supply—is locked in staking contracts. That’s a significant jump from around 13% just one year ago.
Valued at over $39 billion, this growing staking base not only secures the network but also reduces liquid supply, enhancing scarcity. While Ethereum’s staking ratio still lags behind some competing blockchains (where 60–80% of tokens are often staked), its trajectory suggests substantial room for growth—especially as withdrawal functionality becomes more user-friendly and liquid staking solutions mature.
Layer2: The New Frontier of Ethereum Innovation
While The Merge addressed consensus-layer sustainability, Layer2 scaling solutions are solving Ethereum’s biggest practical challenge: high transaction costs and limited throughput.
Today, the combined Total Value Locked (TVL) across Layer2 networks approaches $10 billion, nearing all-time highs. Platforms like Arbitrum, Optimism, zkSync, and Starknet are no longer experimental side projects—they’re thriving ecosystems driving real usage.
Modular Rollups Reshape Development
A key driver of this growth is the rise of modular rollup frameworks such as OP Stack and ZK Stack. These toolkits allow teams to launch customized Layer2 chains with shared security and seamless interoperability.
This shift has fundamentally altered the competitive landscape. Where developers once faced a simple choice—build on Ethereum, Solana, or Cosmos—they now consider a spectrum of rollup-based options tailored to specific use cases: gaming, social media, enterprise applications, and more.
As a result, the narrative around “high-performance L1s” is losing steam. Why choose a monolithic chain with trade-offs when you can deploy a purpose-built rollup with Ethereum’s security backing?
👉 See how Layer2 innovations are unlocking scalable blockchain applications
The Impact of the Dencun Upgrade
The upcoming Dencun upgrade, expected to roll out soon, will supercharge this trend by introducing proto-danksharding—a major step toward full sharding.
This upgrade will drastically reduce data availability costs for Layer2s, potentially lowering transaction fees by up to two orders of magnitude. For users, this means near-zero-cost interactions; for builders, it unlocks new possibilities:
- Mass adoption of microtransactions
- On-chain gaming economies
- Real-time social dApps
- Affordable derivatives and structured products
Historically, high gas fees made complex DeFi operations impractical for average users—sometimes costing $10–$20 per transaction. With cheaper Layer2 execution, these barriers vanish.
Already, platforms like Mirror Protocol have demonstrated how low-cost chains enable innovative synthetic asset markets. As Ethereum’s scaling stack matures, similar breakthroughs will become commonplace.
Institutional Adoption: From Niche to Mainstream
Beyond technology, Ethereum is gaining traction in traditional finance and regulated environments—a sign of maturing credibility.
PayPal’s PYUSD: A Game Changer?
One of the most notable developments is PayPal’s launch of PYUSD, a U.S. dollar-backed stablecoin issued on Ethereum.
As the largest third-party payment processor in the U.S., PayPal brings immense reach and regulatory legitimacy. While PYUSD’s current supply sits at just 44.37 million tokens with only 452 holding addresses, its potential impact is enormous.
By choosing Ethereum as its base layer, PayPal signals confidence in the network’s security, decentralization, and long-term viability. More importantly, it reinforces Ethereum’s vision as a global settlement layer—a neutral backbone for digital finance.
If PYUSD gains widespread adoption across PayPal’s 400+ million users, it could introduce millions to on-chain transactions—and significantly boost Ethereum’s transaction volume and fee revenue.
ETF Momentum Builds
In parallel, regulatory momentum is building around Ethereum futures ETFs. According to Bloomberg sources, the SEC is preparing to approve applications from firms like Volatility Shares, Bitwise, Roundhill, and ProShares.
While spot ETF approvals remain uncertain (mirroring Bitcoin’s early regulatory hurdles), futures-based ETFs represent a critical stepping stone. They give institutional investors regulated exposure to ETH price movements without requiring direct custody.
This follows a familiar path: Bitcoin futures ETFs paved the way for broader acceptance before spot ETFs were eventually approved. Ethereum may be following the same trajectory.
Frequently Asked Questions (FAQ)
Q: What does “Ethereum being deflationary” actually mean?
A: It means more ETH is being burned through transactions than is being issued via staking rewards. This results in a shrinking total supply over time—increasing scarcity and potential value accrual.
Q: How does staking affect ETH’s price?
A: Higher staking participation reduces circulating supply. With more ETH locked up securing the network, less is available for trading—creating upward price pressure if demand remains constant or grows.
Q: Are Layer2 networks safe?
A: Most major Layer2s use “rollups,” which post transaction data directly to Ethereum mainnet. This ensures they inherit Ethereum’s security while offering faster and cheaper transactions.
Q: Will lower fees hurt miners or validators?
A: Ethereum no longer has miners. Validators earn rewards in a PoS system. While base fees may decrease on Layer2s, increased transaction volume can offset this through higher overall activity.
Q: Can PYUSD compete with USDT or USDC?
A: Not immediately—but PayPal’s brand recognition and user base give PYUSD unique distribution advantages. Long-term success depends on integration depth and regulatory clarity.
Q: When will Ethereum’s full sharding be complete?
A: Full sharding is a multi-year roadmap. Proto-danksharding (via Dencun) is the next step, improving data scalability for Layer2s. Full implementation will follow gradually.
Final Thoughts: Ethereum at an Inflection Point
One year after The Merge, Ethereum stands stronger than ever—not just technologically, but economically and institutionally.
With a deflationary supply model, explosive Layer2 innovation, rising staking adoption, and growing ties to traditional finance, Ethereum is evolving beyond a speculative asset into a foundational layer of the digital economy.
Core keywords naturally integrated throughout: Ethereum, The Merge, deflationary, Layer2, PoS, staked ETH, Dencun upgrade, institutional adoption
👉 Explore how Ethereum's evolution positions it for long-term dominance
As scalability improves and real-world use cases expand, Ethereum may finally fulfill its original promise: a decentralized platform capable of supporting global-scale applications—securely, sustainably, and affordably.