{"id":15414,"date":"2024-07-22T15:00:00","date_gmt":"2024-07-22T12:00:00","guid":{"rendered":"https:\/\/forklog.com\/en\/inflation-or-deflation-how-ethereums-economy-has-changed-since-the-merge-hard-fork\/"},"modified":"2024-07-22T15:00:00","modified_gmt":"2024-07-22T12:00:00","slug":"inflation-or-deflation-how-ethereums-economy-has-changed-since-the-merge-hard-fork","status":"publish","type":"post","link":"https:\/\/u1f987.com\/en\/inflation-or-deflation-how-ethereums-economy-has-changed-since-the-merge-hard-fork\/","title":{"rendered":"Inflation or deflation? How Ethereum\u2019s economy has changed since the Merge hard fork"},"content":{"rendered":"

It is nearly two years since the Merge hard fork replaced Proof-of-Work with Proof-of-Stake on Ethereum. Oleg Cash Coin explains how the economics of the second-largest cryptocurrency have evolved since\u2014and the part institutional investors play.<\/p>\n

120,204,432 ETH: where does this figure come from, and what does it mean?<\/strong><\/h2>\n

On September 15, 2022, Ethereum\u2019s developers activated the Merge, shifting the blockchain\u2019s consensus mechanism from Proof-of-Work to Proof-of-Stake. The network\u2019s economic model and tokenomics were overhauled as a result.<\/p>\n

Across a series of upgrades, developers optimised and altered the issuance of new coins and introduced a mechanism that burns a small portion of ETH in every transaction.<\/p>\n

According to Ultra Sound Money<\/a>, as of July 2024 nearly 305,000 ETH have been burned since Ethereum switched to Proof-of-Stake. That has resulted in a negative net issuance of just 0.138% in total, or less than 0.07% annualised.<\/p>\n

\"Inflation
Data: Ultra Sound Money.<\/figcaption><\/figure>\n

Looking back to September 2023 shows a near-identical picture\u2014both in terms of the net change in coins issued and the total number in circulation.<\/p>\n

\"A
Data: Ultra Sound Money.<\/figcaption><\/figure>\n

Back in 2018, Vitalik Buterin proposed capping issuance at 120,204,432 ETH\u2014an almost perfect hit. The envisaged mechanism was different, though: a hard cap akin to bitcoin\u2019s. He arrived at the number by doubling the initial ETH supply sold in the project\u2019s 2014 crowdsale.<\/p>\n

It suggests Ethereum\u2019s founder managed to balance burning and new issuance without resorting to a hard cap, unlike bitcoin.<\/p>\n

For comparison, digital gold\u2019s inflation rate will be about 0.83% annually until the 2028 halving. If ETH maintains roughly -0.07% annualised, it would in effect be more deflationary. Even so, the two systems\u2019 economic designs differ sharply.<\/p>\n

The expansion of decentralised finance (DeFi)\u2014from automated market makers (AMMs) and lending protocols to farming and staking\u2014has created yield-bearing strategies. That has given rise to economic relationships in Ethereum\u2019s blockchain unlike bitcoin\u2019s, making direct comparisons inapt.<\/p>\n

What could change?<\/h2>\n

In March 2024, Ethereum\u2019s developers activated the the Dencun hard fork<\/a>, introducing several updates, including Proto-Danksharding<\/a>. It is designed to scale the network by creating a new transaction type for large binary data blobs (BLOBs).<\/p>\n

The upgrade duly reduced<\/a> fees across L2 networks in the ecosystem, especially those based on rollups. Swap transactions in many networks fell to just a few cents\u2014tens, and sometimes hundreds, of times cheaper than before Dencun.<\/p>\n

\"Inflation
Data: Etherscan<\/a>.<\/figcaption><\/figure>\n

Daily ETH burned also declined, hitting the lowest readings since the 2022 London hard fork that introduced coin burning. On July 7, 2024, Etherscan even recorded a record low of 183 ETH destroyed in a day.<\/p>\n

Given that new issuance runs at around 2,500 ETH, even the post\u2011May 2024 peaks in the 1,000\u2011ETH\u2011per\u2011day burn range do not offset inflation.<\/p>\n

The 30\u2011day burn\u2013issuance delta shows as much, with inflation approaching 0.6% annualised. If the post\u2011Dencun dynamics persist, ether would fall into the inflationary camp.<\/p>\n

Additional pressure<\/h2>\n

In absolute terms, this implies the creation of about 720,000 ETH ($2.5 billion at the time of writing) per year, instead of a negative issuance of roughly 300,000 ETH in each of the past two years. US spot ETFs could easily absorb such volume.<\/p>\n

Note that this is a delta: coins are burned by users making transactions, not by validators. Validators themselves receive more than 900,000 ETH a year (~$3 billion).<\/p>\n

ETFs could still absorb that. Analysts at Citi, for instance, expect net inflows into Ethereum-based funds to be 30\u201335% of bitcoin\u2019s. As CoinDesk<\/a> reports, that implies $4.7\u2013$5.4 billion in the first six months of trading in ETH ETFs.<\/p>\n

However, Ethereum has income streams that can add pressure on price\u2014fees that form an additional reward for validators, for example.<\/p>\n

According to The Block<\/a>, daily L2 revenues slumped after Dencun from $300,000\u2013$600,000 to $100,000\u2013$200,000. Even so, they still amount to significant sums of ETH\u2014around $73 million a year.<\/p>\n

Fees on Ethereum\u2019s main chain collected by validators account for about 15% of the coins. That implies another $450 million in passive income. Add to that the yields of popular DeFi protocols, which run at around $1.2 billion a year.<\/p>\n

A rough tally suggests passive ETH income of about $4.8 billion a year\u2014broadly in line with the inflows expected from US ETFs.<\/p>\n

If the optimistic scenario plays out, institutional inflows could allow Ethereum\u2019s blockchain to offset the selling pressure from coins earned via validation, L2 yields and DeFi protocols.<\/p>\n

Text: Oleg Cash Coin.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

It is nearly two years since the Merge hard fork replaced Proof-of-Work with Proof-of-Stake on Ethereum. Oleg Cash Coin explains how the economics of the second-largest cryptocurrency have evolved since\u2014and the part institutional investors play. 120,204,432 ETH: where does this figure come from, and what does it mean? On September 15, 2022, Ethereum\u2019s developers activated […]<\/p>\n","protected":false},"author":1,"featured_media":15413,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"select":"","news_style_id":"","cryptorium_level":"","_short_excerpt_text":"","creation_source":"","_metatest_mainpost_news_update":false,"footnotes":""},"categories":[1144],"tags":[46,268,1156],"class_list":["post-15414","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-longreads","tag-ethereum","tag-hardfork","tag-institutional-investors-and-whales"],"aioseo_notices":[],"amp_enabled":true,"views":"105","promo_type":"","layout_type":"","short_excerpt":"","is_update":"","_links":{"self":[{"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/posts\/15414","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/comments?post=15414"}],"version-history":[{"count":0,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/posts\/15414\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/media\/15413"}],"wp:attachment":[{"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/media?parent=15414"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/categories?post=15414"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/tags?post=15414"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}