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The Evolution of Ethereum’s Supply Dynamics
The transition of the Ethereum network to a Proof-of-Stake (PoS) consensus mechanism in September 2022 has resulted in a significant reduction of ETH supply. Data from ultrasound.money indicates that 417,413 ETH have been removed from circulation since The Merge, with 1,509,991 ETH burned and 1,092,578 new ETH issued, leading to a net decrease.
At present, the market value of the ETH removed from supply amounts to $1,653,797,635, resulting in an annual inflation rate of -0.23%. This contrasts sharply with Bitcoin, whose supply has grown by 1.716% over the same period, highlighting the divergent monetary policies of the two largest cryptocurrencies.
The Impact of Proof-of-Work Simulation
A simulation on the ultrasound.money dashboard illustrates that, under a Proof-of-Work (PoW) model, Ethereum’s supply would have increased by over 5.5 million ETH since The Merge. The simulation suggests that 7,031,556 ETH would have been issued, leading to a net increase of 5,521,564 ETH. The value of this additional ETH would have been $21,865,393,440, reflecting a theoretical inflation rate of 3.26%.
This stark contrast underscores the deflationary effect of Ethereum’s shift to a PoS consensus mechanism from its previous mining-based system. The transition has considerably curbed new ETH issuance, with validators staking ETH now securing the network in lieu of PoW miners. This shift, in conjunction with the burn mechanism introduced in EIP-1559, has exerted downward pressure on Ethereum’s supply growth.
Current Circulating Supply and Future Implications
Presently, Ethereum’s total circulating supply stands at 120,103,624 ETH. The PoW simulation estimates that, had miners still been powering the network under the old model, the supply would have reached 125,625,188 ETH.
The decrease in supply since The Merge aligns with the Ethereum community’s vision of transforming ETH into a deflationary asset over time, departing from Bitcoin’s fixed inflationary schedule. Advocates assert that the combination of staking rewards and fee burning will continue to counterbalance new issuance, potentially leading to periods of net negative supply changes.
Over the past week, an increase in ETH network fees has fueled a rise in deflationary behavior, with the inflation rate dipping to -1.435%. Even under PoW, the inflation rate would have dropped to 1.911% due to heightened network activity and its connection to the burn mechanism.
Despite these positive trends, critics express concerns about the centralization of network control in the hands of major staking entities and exchanges following the transition to PoS. Some caution that the concentration of staked ETH could undermine Ethereum’s decentralization and security assurances, in contrast to Bitcoin’s more distributed mining network.
Future Trajectories of Ethereum and Bitcoin
As Ethereum continues to adapt under its new PoS paradigm and Bitcoin sticks to its entrenched PoW model, observers will closely monitor how their respective supply dynamics and security trade-offs evolve. With Bitcoin’s issuance set to halve soon, its inflation rate will plummet to 0.8%, approaching Ethereum’s figure. Bitcoin’s fixed supply will ultimately yield an inflation rate of zero, in stark contrast to Ethereum’s inflation rate tied to network activity and transaction burn amounts.
The deflationary trend observed in ETH over the past 540 days provides an early preview of the potential future of the two leading cryptocurrencies before Bitcoin’s impending halving post-The Merge. The long-term viability and implications for both networks remain uncertain, with Bitcoin commanding a market cap of $1.3 trillion and Ethereum following closely behind at $478 billion.
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