It might come as a surprise, but Ethereum (ETH 2.41%) made its noteworthy switch from proof of work to proof of stake more than six months ago. Referred to as The Merge, this transition looks like a distant memory as attention has been focused on the fact that Ethereum is in the midst of an impressive rally to start off 2023 and is up more than 50% so far this year. 

Although Ethereum might be having a much better year than in 2022, it's probably time to check in on how this whole proof-of-stake thing is doing. 

Ethereum before The Merge

The switch from proof of work caused some to believe Ethereum was becoming more centralized. This topic is highly controversial and is an extremely abstract concept, but its important to take into consideration since one of the primary use cases of investing in cryptocurrencies is their premise as an alternative to existing centralized systems. 

Before The Merge, it was relatively easy to measure Ethereum's decentralization and security through the use of a metric called hash rate. Exclusive to proof-of-work blockchains such as Bitcoin, hash rate essentially quantifies computing power which serves as a proxy for decentralization and security. While using proof of work, Ethereum had the second-highest hash rate of all cryptocurrencies. 

But now that it uses proof of stake and we can't use hash rate, gauging whether Ethereum is more or less decentralized and secure can be a little complicated. But let's give it a shot. 

The post-Merge era

There are a plethora of new functionalities that accompanied The Merge, but likely the most significant was the replacement of miners with validators and the ability for holders to stake their funds. 

Without the need for miners, Ethereum's network is secured by these validators, who earn the chance to verify blocks by "staking," or essentially locking up their funds to the network. Therefore Ethereum's decentralization and security are derived from three factors -- the number of validators, the distribution of staked funds among these validators, and the percentage of Ethereum staked relative to its total supply.

Let's start with the number of validators. Since The Merge, this number has been increasing at a steady rate. Today, it sits at just over 600,000. Not only has it been steadily increasing, but in the last month, the rate of new validators has skyrocketed, and this could be an encouraging sign that the network is growing in decentralization.

The validator dilemma

To become a validator, you must pledge 32 ether to the network. That's a lot of money (more than $58,000 at today's prices), but there is a way around it. Those with the technical know-how and resources to set up the equipment can pool together money from other holders and reach the 32 coin limit. Known as staking pools, this option allows anyone to participate in staking, but it has also created a lucrative business model for some centralized players. 

Data show that four validators control roughly 53% of the total amount of staked Ethereum. Three of these validators are centralized companies that provide staking products to customers, such as Coinbase, Kraken, and Binance, and they collectively have 23% of all staked Ether. But the fourth is a decentralized staking protocol known as Lido, and it alone has 30% of the total amount of staked Ethereum.

In an ideal world, there would be a large number of staking pools with an equal distribution of ether staked. Unfortunately, this isn't quite the case. Thankfully, these centralized companies don't control nearly as much as Lido, which claims to be decentralized, but this concentration of staked ether among just a few participants is something to keep in mind.

Lackluster staking ratio

The last factor to consider in Ethereum's new journey as a proof-of-stake blockchain is the amount of ether staked relative to its total circulating supply. This ratio is crucial to evaluate because the greater the number of ether staked, the more secure and decentralized the network becomes.

Unfortunately, Ethereum still lags in this area. Today almost 15% of the total ether supply is staked. Compared to other proof-of-stake blockchains like Cardano, Solana, and Avalanche, which all are above 60%, it becomes clear Ethereum has some work to do.  

Making sense of these numbers

Based on these three metrics, it could be surmised that Ethereum's network is still going through some growing pains. While the number of validators is rising steadily, the total number of ether staked among a few participants and the small ratio of ether staked relative to the total supply is a little concerning.

Despite this, Ethereum is still one of the top blockchains in the world. It boasts a plethora of use cases in decentralized finance and has long-term potential. It looks like it just needs some more time to mature as a proof-of-stake blockchain to return to the levels of decentralization and security it had before The Merge.