Ether (ETH), the crypto fuel that powers distributed applications on the Ethereum platform, will be issued at a constant annual linear rate through the block mining process. This fee is 0.3 times the total amount of ETH that will be purchased in the pre-sale.
While the best metaphor for ETH is “fuel to run the contract processing engine”, for the purposes of this post, we will treat ETH purely as a currency.
There are two common definitions of “inflation.” The first relates to prices and the second to the total amount of money in a system: the monetary base or supply. Similarly for the term “deflation”. In this post we will distinguish between “price inflation”, the increase in the general level of prices of goods and services in an economy, and “monetary inflation”, the growth in the money supply in an economy due to some type of mechanism of issue. . Often, but not always, monetary inflation is a cause of price inflation.
Although ETH is issued for a fixed amount each year, the growth rate of the monetary base (monetary inflation) is not constant. This monetary inflation rate decreases every year, making ETH a disinflationary currency (in terms of monetary base). Disinflation is a special case of inflation in which the amount of inflation is reduced over time.
The amount of ETH that will be lost each year due to transmissions to addresses that are no longer accessible is expected to be on the order of 1% of the monetary base. ETH can be lost due to loss of private keys, death of the owner without transmission of private keys, or intentional destruction by shipping to an address that never generated an associated private key.
Assuming Ethereum sells 40,000 BTC worth of ETH in the pre-sale, and assuming the average price is 1,500 ETH/BTC, 60,000,000 ETH will be created in the genesis block and allocated to buyers. Every year, in perpetuity, 18,000,000 ETH will be issued through the mining process. Taking into account both the creation of new ETH and the loss of existing ETH, in the first year, this represents a monetary inflation rate of 22.4%. In the second year the rate drops to 18.1%. At the tenth year, the rate is 7.0%. In the year 38, it reached 1.9%. And in the year 64 the level of 1.0% was reached.
Figure 1. Existing amount of ETH (dark green curve) on the left axis. Inflation rate of the monetary base (light green curve) on the right axis. Years on the horizontal axis. (Adapted from Arun Mittal with thanks.)
Around the year 2140, the issuance of BTC ceases and since some BTC is likely to be lost each year, it is expected that the Bitcoin monetary base will begin to shrink at that time.
At around the same time, the expected rate of annual loss and destruction of ETH will balance the issuance rate. Under this dynamic, an almost stable state is reached and the amount of existing ETH no longer grows. If the demand for ETH continues to grow at that point due to an expanding economy, prices will be in a deflationary regime. This is not an existential problem for the system since ETH is theoretically infinitely divisible. As long as the rate of price deflation is not too fast, the pricing mechanisms will adjust and the system will work smoothly. The main traditional objection to deflationary economies, sticky wages, is likely not to be an issue, as all payment systems will be fluid. Another frequent objection, borrowers forced to repay loans with a currency whose purchasing power grows over time, will also not be a problem if this regime is persistent, since the terms of the loans will be defined to account for this.
Note that while monetary inflation remains greater than zero for many years, price levels (recorded as price inflation and deflation) depend on supply and demand and are therefore related to the rate of issue ( supply), but are not fully controlled by it. Over time, the growth of the Ethereum economy is anticipated to significantly outpace the growth of the ETH supply, which could lead to an increase in the value of ETH relative to legacy coins and BTC.
One of Bitcoin’s high-value propositions was the algorithmically fixed total issuance of the coin that mandated only 21,000,000 BTC to be created. In an age of wasteful printing of legacy currency in an exponentially doomed attempt to repair the fact that there is too much debt in the global economic system (with more debt), the prospect of a universally accepted cryptocurrency that can eventually serve as a relatively stable store of value is attractive. Ethereum recognizes this and seeks to emulate this core value proposition.
Ethereum also recognizes that a system intended to serve as a consensus-based, distributed application platform for global economic and social systems must strongly emphasize inclusiveness. One of the many ways we intend to encourage inclusion is by maintaining a broadcast system that has some rotation. New entrants to the system will be able to buy new ETH or mine new ETH whether they are living in the year 2015 or 2115. We believe we have struck a good balance between the two goals of fostering inclusion and maintaining a stable store of value. And the constant issuance, especially in the early years, will likely make using ETH to build businesses in the Ethereum economy more lucrative than speculative hoarding.
