Ethereum’s Supply Could Shrink After The ETH 2.0 Upgrade

Ethereum’s supply could shrink after the new ETH 2.0 upgrade as the EIP-1559 added deflationary pressure to the coin so let’s read more in our latest Ethereum news today.

There is now over 118 million ETH in circulation and even though there’s no supply cap on the crypto, don’t expect the number to get higher. According to the simulations from ETH tracker Ultrasound Money, after the PoS transition, Ethereum’s supply could shrink and is set to decline 2% annually and if the rates hold, the blockchain will start burning more ETH than it produces with every new block. At the start of August, ETH developers hit the “go” button on the biggest upgrades ever to the blockchain. The London hark fork and the EIP-1559 an ETH improvement proposal that upped the block size to help combat the congestion on the network and destroyed the transaction fees rather than sending them to the miners.

The goal was to put deflationary pressure on the asset that has a circulating supply six times bigger than Bitcoin’s and this has been achieved already. According to the stats from Watch the Burn, there is about a 57% reduction to the ETH issuance up to date with more than 1.1 million coins being distributed as block rewards to miners and 630,000 have been burned. When ETH undergoes the transformation into ETH 2.0, the deflationary pressure can turn into deflation. ETH relies upon miners to validate and to process the transactions as BTC does and the Proof of work method is going to be replaced by the proof of stake when ETH holders will lock up their coins to secure the network and to get rewards in return.

While the proof of stake already exists on the ETH Beacon chain, it has yet to merge with the proof of work chain. When that happens, the threshold for reaching deflation lowers, and as Tim Beiko who coordinates the work of ETH core developers said, more ETH is being produced with each block except in cases of high congestion which is when the gas price increases to 150 gwei. Beiko added:

“The reason for that is that staking rewards are 5-10x lower than [proof-of-work] rewards. Right now, we get 2 ETH issuance in each [proof-of-work] block. But the Beacon Chain issuance is a fraction of that…so post-merge, we only need to offset that to be deflationary.”

If you are trying to read on mobile, it might not work super well. Here's a direct link to the latest update: https://t.co/66zo6hG1ng

— Tim Beiko | timbeiko.eth (@TimBeiko) October 26, 2021

In other words, after the proof of stake, there will be less ETH created with new blocks and so if the usage measured by gas prices remains steady, there will be less eTH at the end of the year. The exact threshold can’t really be pinned down because we can’t know how many people will stake on the network.