The Ethereum Merge upgrade was supposed to cause a reduction in the ETH supply. So why was it the other way around?
Ethereum supply still increasing despite blockchain’s transition to Proof-of-Stake
According to the data obtained, the supply of Ethereum has increased by 418.88 ETH since the successful upgrade of the blockchain. Some thought that the transition of Ethereum, known as “Merge” in the crypto space, would immediately make Ethereum deflationary. The deflationary system is characterized by a gradual decrease in the money supply over time. While the ETH supply dropped shortly after the Merge (with 248 ETH within twelve hours of the upgrade), it has now hit an all-time high. So, why didn’t Ethereum Merge deliver on its promises?
Prior to Merge, Ethereum distributed around 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 that time, the total supply of Ethereum was inflating at a rate of about 4.62 percent per year. As we reported on cryptocoin.com, once Ethereum’s execution and consensus layers merged, the blockchain stopped giving out rewards to miners. This means that ETH emissions have fallen by 89.4 percent. Validators still receive ETH. But they only make up 10.6 percent of previous rewards.
Although Ethereum supply rises, the drop in issuance is significant
As a result, ETH has reduced annual emissions to about 0.49 percent. Also, in August 2021, Ethereum implemented EIP-1559, which introduced an ETH burning mechanism. Ethereum users pay a base fee (in gwei or a billionth of 1 ETH) for each transaction. This tax is automatically removed from circulation. The data shows that since the implementation of the upgrade, a total of 2,625,258.71 ETH has been burned. However, transaction costs vary depending on how many people are using the blockchain at any given time.
Gas prices are currently around 12 gwei, while they routinely reach 200 gwei during the bull run. In some cases they exceeded 100,000 gwei. According to the Ethereum Foundation, gas fees must exceed 16 gwei for the ETH burning mechanism to reject ETH issued to validators. In other words, the total supply of ETH will increase when Ethereum transactions cost 15 gwei or less, and decrease if it needs 16 gwei or more. Although Ethereum’s supply continues to expand after Merge, it’s worth reiterating that the drop in issuance is significant. Without the transition to Proof-of-Stake, the supply would have already increased by more than 20,994.04 ETH instead of just 418.88 ETH.
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