One of the most heated debates surrounding Ethereum (ETH)’s transition to a Proof-of-Stake network focused on the issuance of ETH. As we’ve reported as cryptokoin.com, the leading narrative behind Merge was that it should make ETH a deflationary currency. Since Merge’s completion on September 15, ETH issuance has been drastically reduced. The estimated annual issuance on the PoS network is around 600,000 ETH. The exact annual issuance will vary over the years as it is determined by the number of validators participating in the consensus mechanism. However, while issuance has declined in theory, the actual supply of ETH has increased since the network abandoned Proof of Work.
Ethereum supply growth expected to increase
Supply growth is currently positive and has grown over 4,000 ETH since Merge. At the current pace, supply is expected to increase by 0.21% annually. Merge has so far failed to make Ethereum a deflationary currency. The supply printed from the PoS network has outstripped the burn rate implemented with the EIP-1559. According to data from Glassnode, the supply of Ethereum is increasing hourly as Proof of Work issuance has ended permanently. The chart below shows that the supply mined by the PoS outstrips the supply burned by the EIP-1559. This resulted in an increase in the net supply of ETH after Merge.
Before Merge, the network had been under inflationary pressure for almost two years. ETH’s PoS issuance started long before Merge. Right after the beacon chain genesis event on December 1, 2020. However, the issuance of PoW was not stopped until September 15, 2022. Transaction pricing mechanism EIP-1559, which implements a flat transaction fee burned in each block, went into effect on August 5, 2021.
Inconsistent execution times further increased the pressure on the network
Since the implementation of EIP-1559, ETH has only been deflationary for very short periods of time. In January and May 2022. The chart below shows the disparity between inflationary and deflationary periods. The first is marked in green, the second in red. However, PoS has managed to drastically reduce the supply of ETH.
In the chart above, the orange line represents the simulated supply if Ethereum continues to exist as a PoW system. The blue line represents the simulated supply if Ethereum existed as a PoS system last year. The data clearly shows that a PoS system drastically reduces the supply of ETH. The chart also shows that inflationary pressure on Ethereum has dropped steadily since Merge. However, we have yet to see if the diminishing pressure eventually leads to a deflationary supply.
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