Ethereum’s proof-of-stake transition: Inflation dynamics and market structure changes

Abstract

We quantify the economic consequences of Ethereum’s transition from Proof-of-Work to Proof-of-Stake. We document a structural break in inflation dynamics, shifting to an ARIMA(2,1,1) process with deflationary tendencies. The relationship between inflation and staking returns weakens post-Merge, challenging assumptions about incentive structures in Proof-of-Stake systems. Analysis reveals significant changes in market microstructure, including reduced spot trading volume and altered futures market behavior. We identify complex feedback loops between on-chain metrics and market variables, defying traditional equilibrium models. Our results suggest the need for new economic models to understand Proof-of-Stake systems and their market implications.