On Sept. 15 last year, Ethereum implemented a pivotal upgrade, the Merge, which switched the largest smart contract blockchain to a proof-of-stake (PoS) consensus mechanism from a proof-of-work (PoW) setting.

Since then, Ethereum has minted 680,455.31 ether (ETH) and burned 980,377.87 ether, causing a net supply reduction of 299,922.50 ether, according to the ethereum analytics dashboard ultrasound.money. In annualized percentage terms, the supply has decreased by 0.249%.

The net supply would have increased by more than 3.8 million or 3% had Ethereum operated as a proof-of-work blockchain.

The PoS mechanism requires market participants to hold a minimum number of ether to validate transactions in return for rewards. The previous PoW setup had miners solving computational problems to record transactions in return for rewards.

The transition to the PoS setup took out a significant amount of miner supply from the market. More importantly, the PoS mechanism burns a portion of transaction fees paid by users. Validators receive the priority fee or the top that users add to the base to entice validators to prioritize transactions. Meanwhile, the base fee is burned, taking ether out of circulation.

The upgrade has made ether a deflationary currency while making Ethereum more environmentally friendly, as expected. Still, at the current price of $1,630, ether has been largely unchanged since the Merge, meaning the upgrade has failed to boost ether’s market valuations. Meanwhile, bitcoin has gained nearly 30% in the past 12 months.

“In August 2022, the Ethereum Foundation warned users that the upcoming Paris upgrade would not reduce gas fees. Subsequently, prices fell, and ether was doomed to underperform bitcoin. But this also hinted towards the next potential catalyst for Ether investors—lower gas fees,” Markus Thielen, head of research and strategy at Matrixport, said in a note to clients last week.

“The reduction of gas [transaction] fees now appears to be the critical missing building block that the next upgrade – called EIP-4844 is trying to solve,” Thielen added.

The Ethereum Improvement Proposal (EIP)-4844, or “proto-danksharding,” is expected to reduce gas fees and increase transaction throughput by introducing blobs for data. These blobs contain a large amount of data like blocks but aren’t stored forever on the Ethereum virtual machine like blocks. That helps the blockchain process data efficiently and cheaply.

The upgrade is set to go live later this year.

“While Ethereum is ‘down’ it is certainly not ‘out’ and Ether investors should slowly monitor any positive news flow around the EIP-4844 upgrade. But a lot is at ‘stake’; if this upgrade is seen as another minimal improvement, then the best days might be behind Ethereum,” Thielen said, noting the increase in Ethereum’s monthly transactions from 28 million to 32 million since the Merge.