Ethereum’s Evolution: The Proactive Shift towards Proof-of-Stake

MV Global
11 min readMay 15, 2023


As the crypto-landscape pulsates with volatility, one digital asset stands tall: Ethereum. Q4 2022 marked a significant milestone for Ethereum, as it successfully transitioned from Proof-of-Work to Proof-of-Stake, solidifying its position amidst market turbulence. Despite challenges, it surpassed Bitcoin and Solana, reflecting its robust fundamentals and its user base’s faith.

This Ethereum analysis delves into Ethereum’s journey, underscoring its financial resilience and market performance around the time of the “Merge” before highlighting its progress since that momentous event. We’ll also cast a gaze towards its promising future, exploring Ethereum’s potential trajectory in the dynamic world of cryptocurrencies. Buckle up for a riveting exploration of this pioneering digital asset.

The Power of the Proof-of-Stake Transition


In the capricious realm of cryptocurrencies, Ethereum stood out in Q4 2022, demonstrating remarkable resilience by surpassing Bitcoin and Solana, despite a 10% market downturn. The key to this fortitude was its strategic shift to the Proof-of-Stake (PoS) consensus mechanism, an innovation initially championed by pioneers like Cardano under the leadership of Charles Hoskinson.

Central to this narrative was ‘The Merge,’ marking Ethereum’s leap from a Proof-of-Work to a PoS system. This pivotal transition fortified Ethereum’s position in the crypto landscape and radically reformed its financial fundamentals.

The Shanghai Upgrade (also referred to as “Shapella”), was completed on April 12th, 2023. The update’s purpose was to initiate a series of software updates. Perhaps most significantly, it allowed users who staked ethereum to withdraw their coins. Users who staked ethereum in 2022 were previously unsure when they would be able to withdraw. This uncertainty loomed like a dark cloud over the event with many expecting severe downward pressure on the price and significant outflows from the staking contract.

Miner rewards were eliminated and replaced by validator tips. The ‘base fee’ is now burned instead of entering circulation, leading to a gross issuance decline by 87% to just 156,000 ETH. Gross issuance was surpassed by the 160,000 ETH in burned transaction fees, bringing net issuance to roughly -4,000 ETH. This net negative inflation suggests that Ethereum’s economic policy is sustainable, and the protocol is sufficiently secured by usage. Ethereum has effectively leveraged the pioneering work of early PoS adopters, such as Cardano, to solidify its own position in the crypto ecosystem.

Unlike other PoS networks, Ethereum has a unique way of managing withdrawals due to its historical Proof-of-Work (PoW) nature. It operates on two layers: the Consensus Layer, where staking and consensus happen, and the Execution Layer, which handles smart contracts, stablecoins, etc. There are two types of unstaking events: Full/Principal Withdrawals (where a validator withdraws their full staked amount) and Partial/Rewards Withdrawals (where staking rewards are distributed to validators).

The transition to PoS enabled Ethereum to burn more coins than it mints, setting the stage for long-term sustainability and ensuring protocol security. This transformative move underscored Ethereum’s adaptability and progressive nature, reinforcing its standing amid market volatility and paving the way for a promising future. In essence, Ethereum’s evolution in Q4 2022 was not just about survival but about thriving in the face of adversity.

Ethereum’s Financial Fortitude

Ethereum’s transition to Proof-of-Stake in Q4 2022 catapulted it into a unique financial echelon, establishing it as a “profit-generating” blockchain. This status was achieved via the innovative burn-and-mint model, an outcome of the transition to Proof-of-Stake.

The advent of staking significantly impacted Ethereum’s financial dynamics, offering a compelling incentive for participation. The effectiveness of this new model was made evident by the impressive leap in return rates — a mere 1% in Q3 2022 to a robust 6% by the end of Q4 and reaching around 8% at the time of writing. This increase underlined the financial viability of staking in Ethereum’s new operational landscape, turning it into a promising avenue for potential growth.

Further solidifying Ethereum’s financial prowess was its ascension as the leader among all Proof-of-Stake chains in terms of staked market capitalization. This unprecedented position highlighted Ethereum’s robustness and the faith placed in its economic model by the crypto community.


The Shapella Upgrade and the Evolution of Ethereum’s Staking

The “Shapella” upgrade not only represented another milestone in Ethereum’s evolution but also greatly affected the dynamics of staking on the network.

Shapella allowed ETH withdrawals from the staking contract, marking Ethereum’s transition to a fully-fledged Proof-of-Stake network. Post-upgrade, two types of unstaking events became possible: Full/Principal Withdrawals and Partial/Rewards Withdrawals, enhancing the flexibility and attractiveness of Ethereum staking.


Despite an initial net outflow of 320,000 ETH from the staking contract after the Shapella upgrade, Ethereum saw a surge in deposit rates, leading to a total inflow of 1.7 million ETH. A gross total of ~2 million ETH has been withdrawn, of which 1.03 million ETH were full withdrawals and 980,000 ETH were partial withdrawals. Since the upgrade, there has been a net inflow of 467,226 ETH bringing total staked ETH to 19,764,573.


Centralized exchanges, especially Kraken, Binance, and Coinbase, had seen significant withdrawal activities. Kraken had to end its staking program in the U.S. due to regulatory issues, leading to it being responsible for 48% of the ETH withdrawn. Coinbase and Binance contributed 11% and 18% respectively. However, the increased participation from staking pools catering to institutions, such as Stakefish,, and, signaled the growing institutional interest in Ethereum’s staking landscape.


This increased activity signaled the community’s trust in Ethereum’s new staking mechanism and its potential for attractive returns The surge in new deposits reflects the lower risk of staking ETH. In the week before Shapella, there were average daily deposits of 14,000 ETH. The deposit rate has risen 600% to a daily average of 81,000 ETH.

Another noteworthy development in Ethereum’s staking scene was the launch of Rocket Pool’s Atlas upgrade on April 18, 2023. This upgrade allowed node operators to run a validator with only 8 ETH of their own capital, making staking more accessible and leading to an increase in the deployment of minipools.

Finally, innovation wasn’t confined to Ethereum’s main network. Staking solutions like Binance, Lido, Obol Network, and Eigenlayer announced and launched new features and services, further enriching the staking ecosystem around Ethereum.


This evolution of Ethereum’s staking landscape post-Shapella demonstrated the network’s adaptability and the community’s commitment to its success. By offering more flexibility and opportunities to earn, Ethereum has positioned itself as an attractive option for stakers, which bodes well for its future growth and stability.

Network Challenges and Triumphs

The inaugural phase of Ethereum’s Proof-of-Stake journey was not without its challenges. A principal issue that emerged was the threat of censorship. Validators began blocking transactions from addresses blacklisted by the U.S. Office of Foreign Assets Control (OFAC). At one point, the proportion of blocks affected by such censorship soared to a worrying 78%.

However, the strength of the Ethereum community shone through in this predicament. A cooperative effort between the Flashbots team and validators managed to combat this issue head-on, reducing the level of OFAC compliance to a more manageable 61% by the end of the quarter. This proactive response underscored Ethereum’s capacity to navigate and overcome network adversities, preserving its commitment to a credibly neutral transactional environment.

Q4 2022 also witnessed a dip in various network usage metrics, with daily transactions falling by 20% and active addresses dropping by 30%, reflecting the market sentiment. However, this downturn should not overshadow the overall strength and potential of the Ethereum network. The crypto market is inherently volatile, and such fluctuations are to be expected. Moreover, the quarter ended with a surge in the addition of unique addresses, indicative of Ethereum’s expanding user base despite the market’s volatility.

While Ethereum’s Layer-1 faced turbulence, Layer-2 solutions emerged as an exciting success story of Q4 2022. Unfazed by the bearish tendencies of the overall market, Layer-2 solutions saw robust transactional activity, nearly mirroring the activity on Layer-1. This strength amidst adversity signals a promising future for Layer-2 solutions and their potential to revolutionize Ethereum’s scalability.


User Expansion and Market Correlations

In Q4 2022, Ethereum’s network experienced a promising swell of expansion, adding a substantial 12 million new unique addresses. This growth occurred despite a slight decrease in daily active addresses. Binance’s wallet consolidation for a Proof-of-Reserves audit was a noteworthy event that created an unexpected spike in active addresses, briefly elevating the count to 1.4 million in early December, before settling back into its normal range between 280k — 650k from then till now. Beyond the anomaly, the remarkable growth in unique addresses demonstrated the sustained interest and expanding user base of Ethereum, reaffirming its appeal in the crypto market.


Simultaneously, Ethereum exhibited interesting correlations with various financial markets. Its performance in relation to traditional market indices and financial indicators offered insights into its market behavior and the larger market sentiment toward cryptocurrencies.

Despite the market downturn, Ethereum maintained a strong positive correlation with major stock indices, Ethereum demonstrated a strong positive correlation with major stock indices, including the Dow Jones Industrial Average (+0.85), NASDAQ 100 (+0.80), and S&P 500 (+0.78). This relationship was indicative of Ethereum’s standing as a robust digital asset, aligning with the performance of major traditional markets.


Conversely, Ethereum presented a strong negative correlation with the U.S. Dollar Index (-0.75) and 10-Year Treasury Yield (-0.68). This inverse relationship signifies Ethereum’s potential as a hedge against conventional financial instruments, particularly in times of economic uncertainty or market volatility.

In Q4, Ethereum’s correlation behavior deviated slightly due to the systemic risk introduced by FTX’s bankruptcy, leading to a moderate positive correlation with the U.S. Dollar Index. This anomaly, however, was more an exception than a norm in Ethereum’s typical market behavior.

Since the turn of the year, it has been back to “factory settings’ for $ETH with its price appreciating from around $1200 on December 1st to around $1800 on 11 May 2023, having peaked in mid April at slightly over $2100.


Ethereum’s Market Performance

Against a backdrop of market turbulence in Q4 2022, Ethereum emerged as a beacon of resilience and strength in the digital asset landscape. Despite the downturn, Ethereum’s performance exceeded that of Bitcoin, the most well-known cryptocurrency. This outperformance wasn’t a fluke, rather it was a testament to Ethereum’s lower inflation and reduced technology risk, traits that have been sharpened by its transition to a Proof-of-Stake model. This outperformance was more than just a statistic; it was a signal of Ethereum’s growing stature as a reliable digital asset, even amidst challenging market conditions.

A significant event that cast a long shadow over the crypto market in Q4 was the bankruptcy of FTX, a major player in the crypto ecosystem. This ‘black swan’ event, triggered a wave of panic selling that sent ripples across the entire cryptocurrency market.

However, Ethereum displayed an impressive resilience in the face of this market shock. While its market performance took a hit, it managed to avoid setting a new cycle low, unlike many other crypto assets. Ethereum’s resilience amid this crisis underscores its robust fundamentals and the faith of its user base, demonstrating its position as a potential safe haven within the volatile landscape of digital assets.


Moreover, Ethereum’s volatility showed a general downward trend in Q4, punctuated only by a temporary spike around the time of the FTX bankruptcy. Fewer liquidations occurred during this period, a reflection of this declining volatility. Such stability is a promising indicator of Ethereum’s maturity as a digital asset, further reinforcing its stature in the crypto market.

An interesting graph worth considering is who is in the money? We can see which stakers are in profit when comparing the price when staked to the price now.


By the numbers:

  • Ethereum’s market downturn in Q4 2022: -10%.
  • Ethereum’s surpassing of Bitcoin and Solana in Q4 2022 despite the downturn.
  • The Merge led to a sharp 87% decline in gross protocol issuance.
  • Real validator returns increased from 1% in Q3 2022 to 6% in Q4 2022.
  • Ethereum’s staked market cap was the highest of all PoS chains, at $19 billion.
  • Censorship of blocks due to OFAC compliance peaked at 78% and was reduced to 61% by the end of the quarter.
  • The addition of 12 million new unique Ethereum addresses in Q4 2022.
  • Ethereum maintained a strong positive correlation with major stock indices: Dow Jones Industrial Average, NASDAQ 100, S&P 500, and Russell 2000.
  • Ethereum had a strong negative correlation with the U.S. Dollar Index and the 10-Year Treasury Yield.
  • Ethereum’s volatility showed a general downward trend in Q4 2022.
  • A total of 12 million new unique addresses were added to the Ethereum network, bringing total unique addresses to 218 million at the end of the quarter.
  • Daily active addresses on Ethereum fell by 12% to 440,000 for the quarter.
  • Average daily transactions for the quarter were 1.1 million, down 8% from Q3.
  • Liquidations surrounding the FTX bankruptcy event totaled $598.06 million and $507.38 million on October 26–27 and October 29–30, respectively.
  • Ethereum’s market uptick in Q1 2023: +80%
  • Net inflow of 467,226 ETH bringing total staked ETH to 19,764,573 as at 12 May 2023
  • 617,704 Validators as at 12 May 2023
  • Current data relating to staking


In the face of broad crypto market turbulence, exacerbated by the FTX bankruptcy, Ethereum outperformed its closest peers such as Bitcoin and Solana, suggesting its perceived role as ‘ultra sound money’.

Looking forward, Ethereum’s future appears bright. Its successful PoS transition and robust financial performance indicate a strong foundation for further growth. The planned upgrade to allow withdrawal of staked ETH is likely to improve its staking ratio, offering greater security for the chain and potentially reducing the floating supply of ETH, which could boost its price.

Additionally, Layer-2 solutions continue to gain momentum, with transaction activity nearly matching that on Layer-1’s. As improvements continue, Ethereum’s scalability is expected to increase, meeting the growing demand for blockspace and enabling a wide array of decentralized applications.

Given its current trajectory and the ongoing developments, Ethereum is well-positioned to maintain its status as a leading blockchain platform in the crypto market. Nonetheless, it will be important to monitor how Ethereum navigates potential regulatory challenges, market volatility, and competition from emerging blockchain platforms in the years ahead.