Is Ethereum deflationary Post-Merge?
One of the three major selling points for Ethereum in the wake of the Merge to Proof of Stake was that its supply would become deflationary.
Has that happened, and how do other chains compare?
The tripartite bull case for Ethereum in the long-term seems pretty clear. By moving away from Proof of Work, and into Proof of Stake, the programmable money blockchain:
a) becomes deflationary over time;
b) becomes yield-bearing (like a dividend stock); and
c) becomes ESG-friendly (with 99.95% lower energy usage),
In the week following the successful Merge, the amount of of new tokens issued on the Ethereum blockchain reached 5,406 ETH (~$7m).
This may seem like a lot, until we realise that this creates an annual inflation rate of just 0.2%.
Simulating the same amount of issuance on Pre-Merge Ethereum, Ultrasound.Money suggests that over the course of a week 103,197 ETH (~$134m) would have been released. This would create an annual inflation rate of 3.79%.
For comparison, Bitcoin’s annual inflation rate is around 1.72%, while Ethereum competitor Cosmos (ATOM) has an annual inflation rate of 5.74%. After the next Bitcoin Halving in 2024, the BTC inflation rate is scheduled to fall to around 1.1%.
And so while Ethereum is not yet deflationary (with annual inflation hovering around 0.2%) the point to note here is that Ethereum’s burn rate is not capped. The more operations performed on the blockchain that consume gas, the more ETH is deleted from circulation.
In the past seven days, 6,300 ETH has been burned. NFT market Opensea remains the largest contributor, with 599.63 ETH deleted, followed closely by DeFi exchange Uniswap, which has burned 522.07 ETH.
When markets shift out of bear market mode, as they eventually will — and demand for blockspace recovers, with trading volumes on NFT markets and transfers between ETH wallets improving — that burn rate will accelerate even further.
Some commentators do need reminding that the state of play in front of them is not the way it has always been, nor will the status quo remain in place for ever.
For example, the philosopher and poet George Santanaya was not a known student of economics, but he still produced one of its best tenets: “Those that cannot remember the past are condemned to repeat it.”
Read The State of Ethereum: The Merge to find out everything you need to know on how ETH will fare in the years to come, with industry-leading insights on block building, MEV, staking rewards, sharding, DEX arbitrage, the fate of miners and much more.
Tom Rodgers is the Head of Research at ETC Group.
