Skip to content Skip to sidebar Skip to footer


Key points to remember

  • Ethereum’s total supply has increased since the merger.
  • The merger reduced ETH issuance by 89.4%, but validators are still rewarded with new ETH.
  • Transaction fees must reach 16 gwei or more for Ethereum’s fee-burning mechanism to fully offset ETH issuance.

Share this article

While the shift to proof-of-stake has significantly reduced Ethereum’s ETH issuance, higher transaction fees are needed for the network’s monetary system to become deflationary.

Inflating total ETH supply

Ethereum’s token supply continues to grow despite blockchain’s transition to proof-of-stake.

According to data from ultrasound.silverAt the time of writing, Ethereum’s token supply has increased by 418.88 ETH since the successful blockchain upgrade on September 15.

Total supply of ETH after the merger. Source: ultrasound.money

Some believed that Ethereum’s move from Proof-of-Work to Proof-of-Stake, known in the crypto space as “Merge“, would immediately cause the Ethereum monetary system to deflate. Unlike “inflationary” currency, a deflationary system is characterized by a gradual reduction in the money supply over time. Although the supply of ETH briefly dropped immediately after the merger (by 248 ETH within twelve hours of the upgrade), it has now reached a new all-time high.

So, has the Ethereum merger not lived up to its promise? No way.

Ethereum’s new monetary policy

Before the merger, Ethereum distributed around 13,000 ETH per day to miners (who ran the execution layer of the blockchain) and 1,600 ETH per day to validators (who ran the consensus layer, or Beacon Chain). At the time, the total supply of Ethereum was inflating by around 4.62% per year.

When Ethereum’s execution and consensus layers merged, the blockchain stopped distributing rewards to miners, meaning ETH issuance dropped by 89.4%. Validators still receive ETH, but it was only 10.6% of previous rewards. As a result, annual ETH issuance decreased to around 0.49%.

Additionally, in August 2021, Ethereum implemented EIP-1559, which introduced an ETH burning mechanism. Ethereum users pay a base fee (denominated in gwei, or one billionth of 1 ETH) for each transaction. This tax is automatically withdrawn from circulation. Data from Ultrasound.money indicates that since the upgrade was implemented 407 days ago, a total of 2,625,258.71 ETH has been burned.

However, transaction costs vary depending on how many people (or algorithms) are using the blockchain at any given time. While gas prices are currently session around 12 gwei, they are used to achieved 200 gwei during the bull run – sometimes exceeding 100,000 gwei. According to the Ethereum Foundation, gas fees must exceed 16 gwei for the ETH burning mechanism to cancel ETH issued to validators. In other words, the total supply of ETH will increase whenever Ethereum transactions cost 15 gwei or less and decrease if they require 16 gwei or more.

It bears repeating that while Ethereum’s token supply has continued to grow following the merger, the decrease in issuance is significant. Without the switch to proof-of-stake, the supply would have already increased by more than 20,994.04 ETH, instead of just 418.88 ETH.

Disclaimer: At the time of writing this article, the author of this article owned BTC, ETH, and several other cryptocurrencies.

Share this article



Source link

Leave a comment