The Merge—Ethereum’s historic transition from Proof of Work to Proof of Stake—has now been live for nearly two months. This monumental upgrade didn’t just shift consensus mechanisms; it reshaped Ethereum’s economic model, network stability, and long-term trajectory. In this comprehensive analysis, we explore how the network has evolved post-Merge, from market reactions and staking dynamics to issuance trends and future scalability.
Market Reaction: “Buy the Rumor, Sell the News”
The Merge followed a classic market pattern: “buy the rumor, sell the news.” In the weeks leading up to September 15th, ETH surged toward $2,000 on anticipation. However, immediately after the upgrade, prices dipped to around $1,250. Despite this pullback, Ethereum has since recovered, reclaiming the $1,500 level and showing signs of renewed momentum.
👉 Discover how Ethereum’s price action is evolving in real time.
Trading volume initially dropped to yearly lows post-Merge but rebounded sharply in October. This resurgence reflects growing confidence and renewed interest in ETH as a core digital asset. Notably, ETH’s share of trading volume on decentralized perpetual platforms reached a three-month high of 56%, signaling stronger demand.
Another encouraging signal is ETH’s declining correlation with Bitcoin. Over the past 60 days, the correlation has fallen to 0.77—the lowest since December 2021—while remaining high over shorter windows (0.90 over 30 days). This suggests ETH may be developing its own market narrative.
Even more telling is its weakening link to traditional markets. The 30-day correlation between ETH and the S&P 500 dropped to +0.20 in late October, down from +0.82 in May. This decoupling could mark a turning point where Ethereum begins trading more independently—a bullish signal for long-term holders.
Network Fundamentals: Stability and Activity
Post-Merge, Ethereum’s on-chain behavior has become more predictable. Block times, once variable under Proof of Work due to mining randomness, now average a consistent 12 seconds under Proof of Stake. The network operates in fixed 12-second slots and 32-slot epochs, reducing volatility and improving transaction finality.
A surge in Beacon Chain deposits followed the Merge, with nearly 450,000 ETH staked in the immediate aftermath—over 2,700 new validators joining the network. October saw another spike: almost 250,000 ETH deposited in a single week, the largest inflow since April.
Concurrently, a major movement of dormant ETH occurred—1.08 million tokens inactive for over two years suddenly moved on-chain. This activity likely reflects both profit-taking by long-term holders ("selling the news") and strategic staking ahead of future yield opportunities.
Historically, such dormant supply movements have preceded significant market shifts. Given current supply constraints and rising staking adoption, this could indicate the early stages of a new bullish cycle.
ETH Issuance: On the Path to Deflation
One of the Merge’s most transformative impacts is on Ethereum’s monetary policy. Under Proof of Work, annual ETH issuance was approximately 5 million. Today, issuance is calculated using the formula:
166 × √(total deposits)
With over 14.66 million ETH staked, annual issuance now stands at roughly 636,000 ETH—a dramatic reduction. Even more importantly, Ethereum is approaching deflationary status thanks to EIP-1559, which burns transaction fees.
When network demand is high—specifically when average gas prices exceed ~15.5 Gwei—more ETH is burned than issued through staking rewards. This dynamic turns ETH into a deflationary asset during periods of high usage.
👉 See how real-time ETH burning affects supply trends.
Additionally, with Beacon Chain withdrawals not yet enabled (pending the Shanghai upgrade), staking rewards remain locked. This has reduced the free float supply by over 170,000 ETH since September 14th. Less liquid supply + increased demand = stronger upward price pressure over time.
Staking Yields and Liquid Staking Innovation
Validator yields now include not just block issuance but also priority transaction tips and MEV (Maximal Extractable Value), boosting returns. Over the past month, top staking pools have delivered annual yields between 4.5% and 6.7%.
With withdrawals still disabled, liquid staking derivatives (LSDs) have surged in popularity. These tokens represent staked ETH while maintaining liquidity—allowing users to participate in DeFi while earning staking rewards.
Lido’s stETH dominates the LSD market with nearly 90% share. Recently, over 8,600 wstETH (wrapped stETH) has been bridged to Optimism, with TVL nearing $15 million. Two major stable pools on Optimism now offer APRs of 8–9%, enhanced by LDO token incentives.
But competition is heating up.
Frax Finance launched frxETH, a new LSD built on a two-token model:
- frxETH: A non-rebasing ERC-20 pegged to ETH, usable across DeFi.
- sFrxETH: An ERC-4626 vault that accumulates staking rewards.
Holders can choose between providing liquidity (earning CRV, CVX, FXS) or staking for higher yield via sFrxETH. Within weeks, frxETH supply grew to nearly 3,800 ETH, with 77% staked across almost 100 validators.
Other protocols are addressing centralization risks in staking:
- IndexCoop is launching dsETH, a diversified staked ETH index that spreads exposure across multiple LSDs.
- Gravity enables interest-free borrowing against ETH and LSDs, boosting capital efficiency and supporting smaller staking providers.
These innovations are making staking more accessible, competitive, and resilient.
The Road Ahead: Scalability and “The Surge”
While the Merge improved energy efficiency and issuance dynamics, it didn’t solve scalability. That challenge is being addressed by Layer 2 solutions like Optimism and Arbitrum—where most new activity is now occurring.
The next major phase—“The Surge”—will introduce sharding, dramatically increasing transaction throughput. Once live, Ethereum could rival centralized payment networks like Visa in capacity.
Until then, Layer 2s remain critical for growth—and LSDs are becoming foundational assets within their ecosystems.
Frequently Asked Questions
Q: Is Ethereum now a deflationary asset?
A: Ethereum is conditionally deflationary. When network usage is high enough that EIP-1559 fee burning exceeds new issuance from staking rewards, the total supply decreases. This has occurred during peak demand periods post-Merge.
Q: What are liquid staking derivatives (LSDs)?
A: LSDs like stETH and frxETH represent staked ETH while remaining liquid. They allow users to earn staking rewards while using their tokens in DeFi protocols such as lending markets or liquidity pools.
Q: Why did so much dormant ETH move after the Merge?
A: Long-term holders likely sold positions ahead of the Merge (“sell the news”), while others moved funds to stake on the Beacon Chain and earn yield once withdrawals are enabled.
Q: When will I be able to withdraw staked ETH?
A: Withdrawals are expected with the Shanghai upgrade, likely in early 2025. This will allow partial and full unstaking from the Beacon Chain.
Q: How do staking yields work after the Merge?
A: Validators earn rewards from newly issued ETH, transaction tips, and MEV. With LSDs, users gain exposure to these yields without running their own nodes.
Q: Can Ethereum scale effectively without sharding yet?
A: Yes—through Layer 2 rollups like Optimism and Arbitrum. These solutions process transactions off-chain and post data to Ethereum, offering scalability today while preserving security.
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