Since Ethereum’s Merge on Sep. 15, 2022, the crypto industry has been abuzz with discussions about its supply dynamics. The Merge marked the network’s transition from a Proof-of-Work (PoW) consensus mechanism to a Proof-of-Stake (PoS), significantly altering its issuance rate. This transition, coupled with the implementation of EIP-1559 in August 2021, has led to oscillations in Ethereum’s supply between inflationary and deflationary states.
In the immediate aftermath of the Merge, Ethereum’s supply exhibited deflationary characteristics. This deflationary trend was primarily driven by the burning mechanism introduced by EIP-1559, which removes a portion of the transaction fees from circulation.
However, observing the supply over shorter time frames shows inflationary tendencies, with an inflation rate of +0.172% observed over a 7-day period.
Over a 30-day period, this inflation stands at +0.013%.
Yet, when zooming out to consider the broader picture since the Merge, Ethereum’s supply remains deflationary, decreasing by -0.251%.
The oscillation between inflationary and deflationary states has profound implications for Ethereum and its stakeholders.
A deflationary asset, by nature, tends to increase in value over time due to its increasing scarcity. This could enhance Ethereum’s value proposition as a store of value similar to Bitcoin, potentially attracting more investors. However, prolonged deflation could also lead to hoarding behaviors, potentially reducing Ethereum’s velocity and utility as a medium of exchange.
On the flip side, a consistently inflationary supply ensures that validators in the PoS system are rewarded for their efforts in securing the network. This continuous…
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