Ethereum Supply Shrinkage: The Impact of Proof of Stake

The ethereum network has seen a 417,413 eth reduction in supply since transitioning to a proof-of-stake (PoS) consensus mechanism in September 2022, according to data from ultrasound.money. In the 540 days since the merger, 1,509,991 eth were burned while the network issued 1,092,578 new eth, resulting in a net decrease.

At press time, the market value of eth withdrawn from supply is $1,653,797,635, which represents an annual inflation rate of -0.23%.

By contrast, bitcoin supply has grown by 1,716% over the same period. This highlights the divergent monetary policies of the two largest cryptocurrencies, as bitcoin maintains a predictable issuance schedule. At the same time, the balance between staking rewards and transaction fee burning now determines the change in ethereum supply.

A proof-of-work (PoW) simulation on the ultrasound.money dashboard shows that the ethereum supply would have increased by over 5.5 million eth during the same period if the network had not switched to PoS. Based on the PoW model, the simulation indicates that 7,031,556 eth would have been issued with the same burn rate of 1.5 million eth, leading to a net increase of 5,521,564 eth from The Merge. The value of eth issued under this simulation would amount to $21,865,393,440, which represents a theoretical inflation rate of 3.26%.

The stark difference highlights the deflationary impact of ethereum's new consensus design compared to its previous mining-based system. The transition to PoS has significantly reduced new issuance of eth, as validators staking eth now secure the network instead of PoW miners. This change, combined with the ongoing burning mechanism introduced in EIP-1559, has put downward pressure on ethereum supply growth.

According to real-time data, the total circulating supply of ethereum currently stands at 120,103,624 eth. Meanwhile, the PoW simulation estimates that the supply would have reached 125,625,188 eth if miners were still powering the network with the old model.

The supply reduction from The Merge aligns with the ethereum community's vision of making eth a deflationary asset over time, diverging from bitcoin's fixed inflationary schedule. Proponents believe the combination of staking rewards and fee reductions will continue to offset new issuances, which could lead to periods of net negative changes in supply.

Over the past seven days, rising eth network fees have facilitated a rebound in deflationary behavior, which rose to -1,435%. Furthermore, even under PoW, its inflation rate would have fallen to 1.911% due to increased network activity and its correlation with combustion mechanics.

However, critics argue that the shift to PoS has centralized control of the network in the hands of major staking entities and exchanges. Some warn that the concentration of staked eth could undermine ethereum's decentralization and security guarantees, in contrast to bitcoin's more distributed mining network.

As ethereum continues to evolve under its new PoS regime and bitcoin maintains its established PoW model, observers will be closely watching how their respective supply dynamics and security trade-offs play out. With bitcoin issuance set to halve due to the upcoming halving, its inflation rate will drop to 0.8%, which is within 1% of ethereum. bitcoin, however, has a fixed supply and will eventually have a zero inflation rate. ethereum's inflation rate is tied to network activity and the amount burned through network transactions.

Still, eth's deflationary trend over the past 540 days offers an early glimpse into the potential future of the two largest cryptocurrencies ahead of bitcoin's first halving since The Merge. The long-term sustainability and implications for both networks remain to be seen, with bitcoin currently thriving with a market capitalization of $1.3 trillion and ethereum following behind with $478 billion.

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