Ethereum’s Transition to Proof of Stake: A $1 Trillion Missed Opportunity
Ethereum made a major transition from Proof of Work (PoW) to Proof of Stake (PoS), reducing the network’s energy consumption by over 99%. While hailed as a technological advancement, some experts, including Meltem Demirors, General Partner at Crucible Capital, argue that Ethereum’s move to PoS was a costly mistake that could have cost the network a trillion-dollar opportunity.
A Missed $1 Trillion Opportunity
Demirors asserts that Ethereum’s switch to PoS led to the proliferation of Layer-2 (L2) scaling solutions, which diluted the core Ethereum ecosystem. According to her, Ethereum had the potential to become a $1 trillion protocol if it had remained on PoW. She argues that by sticking with PoW, Ethereum could have driven innovation in GPU computing, similar to how Bitcoin miners have advanced hardware technology.
Demirors believes PoS has fragmented the Ethereum ecosystem, allowing L2 solutions to thrive, but at the cost of a more centralized, strong Layer-1 (L1) network. “Proof of Stake was a mistake. Ethereum could have been a trillion-dollar protocol with its own robust energy to compute ecosystem,” Demirors explained, highlighting the missed opportunity for Ethereum to lead in hardware innovation and maintain a more cohesive L1 network.
Ethereum’s Inflation Problem Post-PoS
Ethereum’s shift to PoS was supposed to make it deflationary, positioning ETH as a better store of value than Bitcoin. After The Merge in 2022, Ethereum achieved “zero net issuance” for the first time, with the network burning a portion of transaction fees to reduce ETH’s total supply. However, recent data suggests that Ethereum is now experiencing its longest inflationary period since the PoS transition.
According to Ultrasound Money, Ethereum’s annual inflation rate stands at 0.76%, with the network issuing 943,000 ETH annually while only burning 27,000 ETH. This contradicts Ethereum’s earlier narrative of being a deflationary asset. CryptoQuant analysts have pointed out that Ethereum is unlikely to become deflationary again at the current rate of network activity, challenging the idea of ETH as “ultra-sound money.”
Ethereum’s Purpose and Long-Term Value
The transition to PoS was partly aimed at making ETH more valuable by reducing supply and increasing scarcity. However, a statement by Peter Szilagyi, a key Ethereum team lead, has raised debate about Ethereum’s ultimate purpose. Szilagyi claimed that ETH was never meant to be money, but rather to support a decentralized world. Critics argue that this lack of clarity in Ethereum’s vision weakens its long-term value proposition, especially when compared to assets like Bitcoin, which have clear use cases as stores of value.
Scaling Activity on Ethereum
Despite these challenges, Ethereum continues to see significant scaling activity. Vince Yang, CEO of zkLink, noted that the Ethereum network has benefited from the EIP-4844 upgrade, which has reduced gas costs for Layer-2 solutions. This has led to an explosion in Ethereum’s combined transaction volume, with transactions per second (TPS) reaching an all-time high.
The growing scaling activity suggests that while Ethereum’s PoS shift may have created certain challenges, it is also positioning itself for future blockchain developments, especially with the growth of Layer 2 and Layer 3 solutions.
Conclusion
While Ethereum’s transition to PoS was a significant milestone in the crypto world, it has raised debate about whether it was the right move. Meltem Demirors’ claim that Ethereum missed a $1 trillion opportunity by shifting to PoS calls into question whether Ethereum could have achieved greater success by retaining PoW. As Ethereum continues to scale, its long-term value and purpose remain key areas of discussion.
