A Brief History of Ethereum - From PoW to Staking

January 1, 2025

The Proof of Work Era (2015 - 2022)

Ethereum recorded its genesis block on July 30th, 2015. A proof-of-work (PoW) consensus mechanism would secure its chain for the next seven years, similar to how Bitcoin functions.

However, PoW consensus requires miners and large clusters of GPUs, which expend exorbitant computational resources and consume massive amounts of energy. As early as 2016, Ethereum co-founder Vitalik Buterin advocated switching to a proof-of-stake (PoS) consensus mechanism to confront the issue of energy consumption and better position Ethereum for future growth. With PoW, miners gave way to validators.

The Beacon Chain (2020)

Ethereum deployed its staking deposit contract on the execution layer in October 2020. This event opened the door to those seeking to stake their ETH through solo staking, pooled staking, or a staking-as-a-service provider.

The Merge (2022–Present)

The Transition to PoS involved integrating Ethereum’s Execution Layer (aka mainnet) with its Consensus Layer (aka the Beacon Chain). This event, called "The Merge," officially switched the engine of block production to the Beacon Chain.

The Merge meant that Ethereum retired PoW and that Validators were now responsible for producing valid blocks. In PoS, Validators adopted the role previously reserved for miners and now had to propose blocks of transactions and process their validity. In return for their work, they earn rewards through newly issued ETH tokens, transaction fees, “priority tips,” and maximal extractable value (MEV).

Approximately 33.5 million ETH is now staked on Ethereum, with just over one million active Validators participating. This amount represents close to 28% of ETH’s total supply.

A notable shift that PoS ushered in is ETH’s annual inflation rate. Under PoW consensus, the daily issuance provided for an annual inflation rate of over 4%. However, EIP-1559 introduced a base fee-burn mechanism and priority fees to validators, which helped bring down Ethereum’s current annualized inflation rate to 0.67%.

Staking on Ethereum

Staking is the driving force that helps secure PoS blockchains like Ethereum. After transitioning to PoS in 2022, participants are now required to stake a minimum of 32 ETH to become an active Validator on the network.

Staking is instrumental to how the network reaches consensus. PoS consensus is a process where Validators propose, verify, and attest to new blocks coming onto the chain. Staked ETH contributes to economic security and serves as an incentive for participants to behave in behalf of the network's best interests. It is a system of carrots and sticks where Validators receive ETH rewards for performing their duties honestly, or their collateral stake can get slashed for malicious behavior.

With the transition to PoS in The Merge, staking has become one of the pillars of Ethereum's roadmap.

Liquid Staking Derivatives

One of the early challenges of staking was the withdrawal process. Participant’s inability to withdraw stake resulted from staked ETH flowing in only one direction from the Execution layer—where the staking deposit contract resides—to the Consensus layer, thus preventing redemptions. The liquidity of staked ETH prevented any further utility.

Furthermore, the outsized capital requirements of the 32 ETH minimum staking ($110,400 at today’s prices), along with the demands of running an Ethereum node, provided formidable barriers to entry for most potential stakers.

Such challenges prompted the rise of pooled staking providers and liquid staking tokens (LSTs). Pooling solutions like Lido capitalized on this lucrative opportunity, allowing users to participate in staking with smaller denominations of ETH without having to run a Validator node.

Stakers receive an LST that represents the underlying staked assets. LSTs allow participants to earn staking rewards without coming up with 32 ETH and without getting locked. Such solutions lowered the barriers to entry for staking and widened the participant base to help secure the Ethereum network.

Presently, 9.8 million ETH is staked through Lido, which is a 29% market share of all staked ETH. This percentage is a cause for some concern because should it pass the 33% threshold, it introduces centralization risks.

Pooled staking makes participation more accessible and has fueled the utility of LSTs like Lido’s stETH in decentralized finance (DeFi) applications, whether as liquidity on decentralized exchanges (DEX’s) or collateral on the lending protocols. LSTs are also popular forms of liquidity reserves on Layer-2s and DEXs, and they provide economic security on re-staking protocols.

Introducing Re-staking

Since EigenLayer came on mainnet in 2023, re-staking has become one of the fastest-growing verticals in Web3. The difference between staking and re-staking is that staking ETH secures the Ethereum network while re-staking allows these staked assets to secure external services built on Ethereum. These include services like bridges, data availability layers, oracle networks, and others using either natively staked ETH or LSTs. Re-staking helps new protocols bootstrap security without the expense of sourcing their own validators.

Re-staking extends Ethereum’s security model across the ecosystem. Furthermore, it unlocks greater capital efficiency of staked ETH. There are risks, however, when managing staked assets and liquid representations of restaked assets.

The Road Ahead

To sum up, Validators get rewards for participating in the consensus process through ETH issuance, priority tips, and MEV derived from the execution and consensus layers. The estimated ETH staking APR stands at just over 3% excluding MEV.

Ethereum’s staking ecosystem has evolved since The Merge, and its future depends on multiple converging factors. With its staking ratio passing 25% of the total ETH supply and the Validators numbering more than one million, researchers (and the community) are considering changing Ethereum’s issuance curve and the Validators' maximum effective balance.

Such recent proposals stem from concerns about ETH’s growing staking ratio and incentives that favor LSTs over the underlying ETH (and other things), which will be discussed in the next Ethereum article.