Does Ethereum have a supply limit (and why is this an important question)?





We often hear the argument that BTC is the ultimate hedge from inflation as its supply is limited to 21 million and halves every four years. This has led to a misperception that crypto– Unlimited supply currencies are inflationary, which means that their value decreases over time. It is therefore questionable whether Ethereum (ETH) has a bid limit.

On April 1, 2018, Vitalik Buterin jokingly suggested limiting the total ETH supply to 120 million. His reasons? Ensuring a more stable and sustainable economy for Ethereum. While this is just an April Fool’s joke, it brings us to the inflationary vs deflationary discussion surrounding the cryptocurrency supply.

The Ethereum offer

During the Ethereum ICO in 2014, the total supply of Ether was around 72 million; Fast forward eight years later, through June 2022, Ethereum’s total ETH supply is just over 121 million. This might interest you: These 3 cryptocurrencies could make their investors millionaires: Calyx Token (CLX), Dogecoin (DOGE) and Monero (XMR).

Ethereum doesn’t have a supply cap, but that doesn’t mean we’ll have billions of Ether in circulation. The number of ETH issued is steadily declining, which means that inflation is not a major concern for Ethereum. It is also important to note at this point that Ethereum and Ethereum Classic are completely separate protocols.

In addition to the annual bid limit, Ethereum’s future supply is highly dependent on its monetary policy.

Ethereum monetary policy

While limiting the supply of a currency is an effective way to curb inflation, it’s not the only one. It could be argued that supply limit could prove counterintuitive in the future as decentralized finance (DeFi) continues to grow. Read also: Investors from Solana (SOL) and Terra (LUNA) are now jumping on this cryptocurrency for its rapid growth!. As used on Ethereum, monetary policies can be implemented to curb inflationary pressure without relying on supply limits.

It should be noted that Ethereum does not have a fixed monetary policy – its monetary policy is subject to change based on Ethereum’s Enhancement Proposals (EIPs). These EIPs played a crucial role in determining Ethereum’s supply program. An EIP is the common way to propose and make changes to the Ethereum network.

This monetary policy is best defined by the premiums paid on Ethereum at any given time. These rewards, which tend to increase the supply of ETH, include Ether issued per block and commissions awarded to miners.

The history of Ethereum is littered with cases of estimated minimum emission reduction. It should be noted that Ethereum does not have a fixed supply, unlike other altcoins such as Cardano, which is why its monetary policy can be described as “minimum issuance to protect the network”. Currently, the annual issuance on Ethereum is around 3.68% and has steadily declined over time.

In the future, it is impossible that aether emissions will ever increase. This is due to the implementation of Ethereum 2.0, whose proof-of-stake is designed to reduce emissions, and EIP-1559, which introduced burning, effectively ensuring that more ETH is burned than created. Furthermore, the upcoming Ethereum merger will drastically reduce the issuance rate to less than 1%. And this leads us to the question: is Ethereum deflationary?

Is Ethereum Deflationary?

Ethereum could soon become deflationary. Ethereum has managed to contain inflation, through the use of a Proof-of-Work consensus mechanism, two main factors are used to control inflation, block time and block rewards. Read also: PlaceWar: a promising new P2E project in the NFT and Metaverse universe in 2022?. But with the launch of Ethereum 2.0, EIP-1559, and the upcoming Ethereum merger, the network is expected to become deflationary.

Ethereum 2.0 has introduced the PoS consensus mechanism and is expected to significantly reduce the issuance rate. The introduction of PoS has made mining rewards in PoW obsolete. Instead, it introduces a sliding scale between the amount of ETH staked by network validators and the interest they will earn, further incentivizing miners to mine ETH rather than PoW coins, such as Litecoin.

What is EIP-1559?

One of the most consequential EIPs in determining Ethereum’s offering is EIP-1559, which introduced a deflationary mechanism through the destruction of the base rate. It went into effect in August 2021 and introduced the ETH burn mechanism.

First, EIP-1559 introduced a basic fee on all transactions, calculated based on network activity. Once the basic fee is paid, it is immediately burned. This means that miners no longer have an incentive to validate transactions with higher gas fees as they will not receive this gas fee.

EIP-1559 explains that if more ETH is burned on the base rate than the mining rewards generated, Ethereum will be deflationary. After EIP-1559, Ethereum went deflationary on several occasions, when the number of ETH burned exceeded the number of ETH created. In this case, commission consumption can be described as a scarcity mechanism dependent on the transactional utility of the Ethereum network.

This means that the overall supply of ETH decreases as more ETH is destroyed by the burning of fees. Since commission consumption depends on network activity, the more transactions on the Ethereum network, the more ETH are burned and the lower the issuance.

The commission burning is designed to destroy the basic ETH fee that users pay for transactions on the Ethereum blockchain. Keep in mind that the base fee is the minimum required to add a transaction to an Ethereum block. Typically, users can also pay a priority fee to get transactions cleared more quickly. However, only the base rate is burned.

Since EIP-1559 was activated, more than 2.5 million ETH was burned in July 2022.

The merger of Ethereum

The Ethereum merger (EIP-3765) is the official transition from proof-of-work consensus to proof-of-stake consensus. On March 15, 2022, the Ethereum Foundation announced that the merger was ready to be implemented on the Ethereum public core network. It should take full effect in the third or fourth quarter of 2022. What is the impact on the cryptocurrency supply and on the Ethereum cap?

The most significant aspect of the merger is the triple halving of the issuance of ETH, the equivalent of three halves of Bitcoin. The merger represents the latest step in the total deflation of Ethereum. Occurs when Mainnet merges with the ETH2 beacon chain, effectively reducing ETH emission by up to 90%.

Daily issuance is estimated to drop from 15,000 ETH to around 1.5 ETH when the merger is completed. This will result in a drastic drop in the annual emission rate to less than 1% and, in the long run, could fall below zero.

Using the Ethereum Merge Simulator on Ultra Sound Money, we can see that the annual supply growth is around -1.9%.

Conclusion

So, does Ethereum have a bid limit? No. Although Ethereum has been considered an inflationary cryptocurrency, a number of updates ranging from Ethereum 2.0, EIP-1559, and the upcoming Ethereum merger are making Ethereum deflationary. The EIP-1559 update is one of the largest in the Ethereum network. It introduces a deflationary mechanism through the destruction of the base commission. And the upcoming Ethereum merger will drastically reduce the issuance rate to less than 1%.

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Thomas E.
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