Ethereum's Move to Proof-of-Stake and the Decline in Ether Supply
Ethereum's move to proof-of-stake and the implementation of EIP-1559 have led to a decline in the supply of ether, potentially impacting the cryptocurrency's value proposition and hindering its growth.
Ethereum, the world's second-largest cryptocurrency, has recently undergone a significant change in its consensus mechanism, moving away from the energy-intensive proof-of-work to a more environmentally friendly proof-of-stake method. This change was known as "The Merge" and has resulted in a decline in the supply of ether, the native coin of Ethereum.
According to Ethereum tracking website ultrasound.money, over the last 217 days, the total supply of ether has declined by 103,092 coins, worth more than $200 million at current prices. If The Merge had not occurred and Ethereum remained secured by miners, the ether supply would have increased by more than 2.52 million coins, or $4.9 billion. The supply of Ethereum's native coins would also have increased yearly by 3.53%. Instead, post-Merge Ethereum's coin supply is down by 0.144% per year. Furthermore, ultrasound.money claims that $1.2 billion is being removed from the ether supply over the same time frame.
It is important to note that while The Merge may have catalyzed the reduction in native-coin supply, it was not the sole cause. The burning of ether was triggered by Ethereum Improvement Proposal 1559 (EIP-1559), which was pushed via the London upgrade. EIP-1559 effectively split transaction fees into a base cost and a priority fee, with the former burned and the latter serving as a form of payment to miners. Since miners no longer exist for the protocol, the priority fee now serves as a payment to stakers.
EIP-1559 was also designed to exert deflationary pressure on the ether supply since the base fee gets burned and can no longer be used on the network, reducing the amount of inflation on the Ethereum network. However, it did not decrease the blockchain's total supply. Since the London upgrade went live, the total supply of ether has increased by 3.21 million coins.
The burning of ether has increased since Ethereum's Shapella upgrade, which opened up staked ether withdrawals just over one week ago. This development has given stakers more control over their ether holdings, allowing them to withdraw and burn their ether as they please. This could potentially accelerate the decline in the ether supply.
The decline in the ether supply may have implications for Ethereum's value proposition. With a lower supply of ether, the demand for the coin may increase, leading to a rise in its value. This could also make Ethereum more attractive to investors and traders, especially those looking for a hedge against inflation.
However, the decline in the ether supply could also have negative consequences. For example, if the supply of ether becomes too scarce, it may become difficult to use the coin for everyday transactions on the Ethereum network. This could hinder the growth of the network and limit its use cases.
