Ethereum’s Shift to Proof-of-Stake

The Merge explained

Hamburg, 16 May 2025 - Ethereum, the largest Proof-of-Stake (PoS) layer-1 blockchain platform, underwent a transformative upgrade in 2022, shifting from energy-intensive Proof-of-Work (PoW) to the more efficient PoS consensus mechanism. This pivotal change, known as “The Merge,” tackled Ethereum’s scalability challenges while enhancing its security and decentralization. Here’s a deep dive into how PoS powers Ethereum and why it matters. Please note that the information in this article reflects the state of Ethereum prior to the Pectra-Upgrade.

The Merge: A Paradigm Shift

On September 15, 2022, Ethereum executed the Paris upgrade, dubbed “The Merge”, marking its leap to PoS. The goal? To solve the blockchain trilemma, where scalability (handling more transactions), security (protecting the network), and decentralization (spreading control) often trade blows. Proof-of-Work (PoW), Ethereum’s original mechanism, relied on miners solving computational puzzles to validate transactions, consuming vast energy and struggling to scale. PoS flips this model, replacing miners with validators who stake their ETH to secure the network, making it more sustainable and predictable.

Ethereum’s PoS splits its operations into two layers: the execution layer, which handles transaction processing and smart contract execution, and the consensus layer, which ensures all nodes agree on the blockchain’s state. Before The Merge, the execution layer ran on PoW, with miners and validators splitting rewards. Post-Merge, validators take the full reward, streamlining incentives and boosting efficiency. Unlike PoW’s variable block times, PoS uses a rigid schedule: blocks are produced every 12 seconds in slots, with 32 slots forming an epoch (about 6.4 minutes). This predictability allows validators and users to forecast block production, a stark contrast to PoW’s volatility.

The illustration below visualizes recent epochs along with their respective slots. Green slots indicate successfully proposed blocks, while orange slots represent scheduled but unprocessed slots. The bar beneath each epoch illustrates the participation rate during that epoch. The y-axis denotes the epoch number, whereas the x-axis represents the slot number, with each epoch comprising a total of 32 slots.

Slot Visualization of recent epochs and their slots https://beaconcha.in/charts/slotviz

 

Validators: Powering Ethereum’s Trust Engine

In PoS, validators are the heartbeat of the network. To become a validator, a participant must stake at least 32 ETH, locking it as collateral to ensure honest behavior. Validators propose and attest to blocks, earning rewards for their work. But with great power comes great responsibility: malicious actions, like proposing invalid blocks or going offline, trigger slashing, where a portion of the validator’s stake is burned. This penalty discourages attacks, as the financial cost is steep.

The PoS system tracks validators meticulously, logging their stakes, votes, and performance. This transparency strengthens trust and security, as anyone can audit validator activity. Unlike PoW, where miners with the most computing power dominated, PoS levels the playing field — your stake, not your hardware, determines your influence. This shift enhances decentralization, as more participants can join without investing in energy-guzzling mining rigs.

Ethereum’s PoS Power: Efficiency Meets Security

The switch to PoS unlocks a trifecta of benefits: energy efficiency, scalability, and robust security. PoW’s massive energy consumption — think small-country levels — made it an environmental lightning rod. PoS slashes Ethereum’s energy use by over 99,988%, aligning with global sustainability goals and attracting eco-conscious developers and investors. To highlight the impact of this shift in consensus mechanisms, the following illustration compares Ethereum’s PoS energy usage to other major consumers. In particular, the contrast with Bitcoin’s PoW (149 TWh/yr) and Ethereum’s former PoW system (21 TWh/yr) underscores the scale of energy savings.

Annual Energy Consumption in TWh/yr https://ethereum.org/en/energy-consumption/

Scalability also gets a boost: PoS handles transactions faster and cheaper, paving the way for Ethereum to support the booming demand for decentralized apps (dApps) and decentralized finance (DeFi) platforms.

Security is fortified through slashing and high staking costs, which deter attacks. An attacker would need to control 51% of staked ETH — a prohibitively expensive feat, especially with Ethereum’s market cap. Plus, PoS’s predictable block production reduces the risk of chain reorganizations, where miners could rewrite recent history. These upgrades make Ethereum a fortress: decentralized, resilient, and ready for mass adoption.

Distinguishing Between Direct and Indirect Staking

There are two main methods of staking ETH, which are distinguished into direct and indirect. Direct staking involves validators depositing at least 32 ETH and running their own node, while indirect staking involves those who participate in staking pools through a third-party service provider because they do not meet the minimum requirement of 32 ETH. Although direct staking offers lower or even no fees and allows validators to receive staking rewards directly, it requires a higher level of technological knowledge and implies greater responsibility. With the total ETH amount per validator being limited and the probability of attesting, proposing and voting for blocks being randomly, entities or persons operating multiple active validators maximize their probability of being selected and therefore create a competitive edge.

Following the final transition to PoS, a clear upward trend in staked ETH emerged. While Ethereum’s total supply has remained stable at approximately 120 million since The Merge, the amount of staked ETH by validators has grown significantly, rising from 14.6 million ETH (12.11% of total supply) in September 2022 to 33.3 million ETH (27.7% of total supply) in June 2024. This trend reflects increasing network stability, trust and security, as more participants commit ETH to staking. Additionally, it highlights the effectiveness of Ethereum’s incentive mechanisms in driving validator participation and reinforcing network resilience.

Potential Risk of Centralization

A potential key problem with of PoS is the higher risk of centralization, with a small number of entities having the potential to control most of the staked ETH amount. In such a case, a small group of validators could obtain excessive powers and influence over the network and pose a monopoly threat in terms of crypto asset whales, exchanges, and pools for staking. Besides, concerns have been raised about whether PoS could have a higher security in terms of vulnerability to specific types of attack that could enable malicious entities to gain control over the network. Existing optimization strategies mitigate this potential risk, making such scenarios increasingly difficult. In a well-functioning network with effective slashing mechanisms, any attack attempt would trigger a negative feedback loop for the attacker.

Malicious behavior results in a 33% reduction of staked ETH due to slashing penalties. To launch a new attack, additional ETH must be acquired, repeating the costly cycle. This significantly lowers the risk of centralization. The Dune Dashboard below illustrates the percentage distribution of all staking providers within the Ethereum network. As of February 17, 2025, the three largest entities are Lido (27.7%), unidentified independent stakers (19.9%), and Coinbase (8.4%). Unidentified independent stakers in this context refer to the aggregated amount of staked ETH by validators that are not associated with major centralized exchanges (CEXs) or staking pools. While this distribution does not pose an immediate centralization risk, it highlights the previously mentioned concentration of staking power among a few dominant participants.

ETH stakers ordered by amount staked, https://dune.com/queries/2394100/3928083

Building Tomorrow: Ethereum’s PoS Promise

Ethereum’s PoS transformation isn’t just a technical upgrade — it’s a bold step toward a scalable, sustainable, and secure blockchain future. By replacing miners with validators, slashing energy use, and enhancing network predictability, Ethereum is poised to power the next wave of Web3 innovation. As Ethereum continues to evolve, its PoS framework stands as a blueprint for how blockchains can balance ambition with responsibility.

About coinIX GmbH & Co. KGaA

Founded in 2017 and based in Hamburg, coinIX GmbH & Co. KGaA specializes in blockchain investments and digital assets. The firm’s team includes experts in asset management, venture capital, and emerging technologies.

coinIX invests in cryptocurrencies, token projects, and blockchain startups within decentralized markets. The company’s shares are publicly traded on the Düsseldorf, Berlin, and Munich stock exchanges (WKN: A2LQ1G | ISIN: DE000A2LQ1G5 | Ticker: XCX).
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About coinIX COINVEST SCI1

The coinIX COINVEST SCI1 is a German special AIF (Alternative Investment Fund) launched in June 2022, managed by coinIX Capital GmbH, a registered capital management firm. The fund is available exclusively to professional and semi-professional investors and can invest up to 100% of its capital in crypto assets.

It actively manages a diversified digital asset portfolio, generating additional income through staking and blockchain-native financial strategies. The fund’s ISIN is DE000A408Q55, and investments can only be made directly through coinIX. It is not available to private investors. More details: coinIX COINVEST SCI1.

Author: Rafael Ruiz Cramme

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