As the ecosystem expected, Ethereum’s move to a proof-of-stake consensus, symbolised by The Merge event, has significantly reduced ETH inflation. Indeed, data collected over the past few days shows a 95% drop.
The Merge has had a positive effect on ETH inflation
As one Ethereum (ETH) educational content creator noted on Twitter, the positive effects of The Merge are already beginning to be felt on the inflation of the second most capitalized cryptocurrency in the market:
It’s been a little over a week since The Merge 🐼
If Ethereum was still PoW, the supply of ETH would’ve gone up by ~100,000
Instead, the supply of ETH has only gone by up ~5,000
This is a 95% reduction in net ETH issuance (includes the burn which is very small right now)
– sassal.eth 🦇🔊 (@sassal0x) September 23, 2022
While the data he presents has obviously evolved, 24 hours after his thread, the essence of his thoughts remains the same.
One week after the move to a proof-of-stake (PoS) consensus, just over 6,200 new ETH have been created at the time of writing. If we had remained on a proof-of-work (PoW) consensus, this value would have been over 115,300 new ETH during the same period.
This is equivalent to an inflation reduction of almost 95%.
Sassal goes on to project the data over a one-year period. He suggests that in a PoW model this would be equivalent to 5.2 million ETH inflation, or $7 billion at current prices, compared to 260,000 new ETH, or $350 million under the PoS consensus.
There are limits to this thinking, however, and if it was correct at the time of his calculations, it is already flawed.
And for good reason, since EIP-1559, the issuance of ETH also depends on the use of the blockchain. The more the blockchain is used, the more ETH are burned. As this network usage is volatile, it is not possible to create a reliable long-term model from a period of only a few days.
Nevertheless, this projection, although not relevant, has the merit of making us fully aware of the power of the Merge on ETH emission.
Is the Ether becoming deflationary
As stated earlier, this will depend on the use of the blockchain. At this point, taking into account the network’s load, ETH would have an inflation of 0.21% per year compared to 3.8% in a PoW model, according to the ultra sound money site.
It is important to stress that this data naturally changes on a daily basis. Thus, during a bull market, with an over-subscription of the Ethereum blockchain, it is certain that the asset will go through periods of deflation, which is not yet the case.
In his thread, Sassal also points out that before The Merge, miners created some downward pressure by selling their work product to cover their expenses. This is no longer the case.
Better still, validators need to lock in ETH to run their nodes. This means that the more validators there are, the more ETH will be “locked in”, helping to create an environment for prices to rise.
