Appointed captain in 2023, the 30-year-old told teammates he would step down from the role after returning to preseason training.
Vice-captain Andrew McGrath is the early favourite to become the club's next skipper.
"It's been weighing on my mind around who is the best person to lead this club and [the] group moving forward, and I feel like I've come to the decision that I'm not the right person," Merrett said in a club statement.
Desperate for success, Merrett had requested his trade to Hawthorn after losing "love and connection" with the Bombers.
The six-time Bombers best-and-fairest winner has not won a final across 251 matches for Essendon since his debut in 2014.
The Bombers last won a final in 2004.
Merrett was forced to remain at the club after Essendon, refusing to trade the star midfielder under any circumstances, knocked back every offer from the Hawks.
Jy Simpkin, who similarly had a failed trade from North Melbourne despite being contracted, is poised to join Merrett in giving up the captaincy.
Simpkin, desiring more midfield time, could not engineer a trade to another club.
North Melbourne has the second-longest drought without a finals win, dating back to 2015.