Why has ETH supply increased since the merger?

The central theses

• The total supply of Ethereum has increased since the merger.
• The merger reduced ETH issuance by 89.4%, but validators are still rewarded with new ETH.
• Transaction fees must reach 16 Gwei or more for Ethereum’s fee burning mechanism to fully offset ETH issuance.

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While the move to proof-of-stake greatly reduced Ethereum’s ETH issuance, higher transaction fees are needed for the network’s monetary system to become deflationary.

Inflation of ETH total supply

Ethereum’s token supply is still increasing despite the blockchain’s transition to proof-of-stake.

According to data from ultrasound.moneyAt the time of writing, Ethereum’s token supply had grown by 418.88 ETH since the blockchain was successfully updated on September 15th.

ETH overall supply after the merger. Source: ultrasound.money

Some thought that Ethereum’s shift from proof-of-work to proof-of-stake, known as “merge” in the crypto space, would immediately result in Ethereum’s monetary system becoming deflationary. Unlike “inflationary” money, a deflationary system is characterized by a gradual reduction in the money supply over time. Although the supply of ETH dropped briefly immediately after the merger (by 248 ETH within 12 hours of the upgrade), it has now reached a new all-time high.

So has the Ethereum merger not lived up to its promises? Not at all.

Ethereum’s new monetary policy

Before the merger, Ethereum distributed about 13,000 ETH per day to miners (running the execution layer of the blockchain) and 1,600 ETH per day to validators (running the consensus layer or beacon chain). At the time, Ethereum’s total supply was growing at around 4.62% per year.

When Ethereum’s execution and consensus layers merged, the blockchain stopped distributing rewards to miners, meaning ETH issuance fell by 89.4%. Validators still receive ETH, but they accounted for only 10.6% of previous rewards. Consequently, annual ETH issuance dropped to around 0.49%.

Additionally, in August 2021, Ethereum implemented EIP-1559, which introduced an ETH burning mechanism. Ethereum users pay a base fee (in Gwei, or one billionth of 1 ETH) for each transaction. This tax will be automatically phased out. Ultrasound.money data shows that a total of 2,625,258.71 ETH has been burned since the upgrade was implemented 407 days ago.

However, transaction costs vary depending on how many people (or algorithms) are using the blockchain at any given time. While gas prices are currently meeting at about 12 gwei, they routinely reached 200 gwei during the bull run – over 100,000 gwei on a few occasions. According to the Ethereum Foundation, gas fees must exceed 16 Gwei for the ETH burning mechanism to negate ETH issued to validators. In other words, the total supply of ETH will increase when Ethereum transactions cost 15 Gwei or less and decrease when they require 16 Gwei or more.

It is worth repeating that although Ethereum’s token supply has continued to increase in the wake of the merger, the drop in issuance is significant. Without the switch to Proof-of-Stake, the supply would have already increased by more than 20,994.04 ETH – instead of just 418.88 ETH.

Disclaimer: At the time of writing, the author of this article owned BTC, ETH, and several other cryptocurrencies.

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