Ethereum (ETH): Inflation has fallen nearly 95% since The Merge

As the ecosystem expected, Ethereum’s move to proof-of-stake consensus, symbolized by The Merge event, significantly reduced ETH inflation. Indeed, the data collected over the last few days shows a drop of 95%.

The Merge had positive effects on ETH inflation

As one Ethereum (ETH) educational content creator noted on Twitter, the positive effects of The Merge are already beginning to show in the inflation of the second most capitalized cryptocurrency in the market:

It's been a little over a week since The Merge 🐼

If Ethereum was still PoW, the supply of ETH would've gone up by ~100,000

Instead, the supply of ETH has only gone by up ~5,000

This is a 95% reduction in net ETH issuance (includes the burn which is very small right now)

— sassal.eth 🦇🔊🕯️🌊 (@sassal0x) September 23, 2022

If the data he exposes have obviously evolved, 24 hours after his thread, the very essence of his reflections remains the same.

A week after the move to Proof of Stake (PoS) consensus, just over 6,200 new ETH has been created as of this writing. If we had stayed on a proof-of-work (PoW) consensus, this value would have been over 115,300 new ETH during the same period.

This data is therefore equivalent to a reduction in inflation of almost 95%.

Sassal continues its reflection by projecting the data collected over a period of one year. According to him, in a PoW model, this would equate to an inflation of 5.2 million ETH, or $7 billion at the current price, compared to 260,000 new ETH, or $350 million with the PoS consensus.

This reflection, however, has limits, and if it was correct at the time of its calculations, it is already distorted.

And for good reason, since EIP-1559, the issuance of ETH also depends on the use of the blockchain. The more the latter is used, the more ETH is burned. As this network usage is volatile, it is not possible to create a reliable long-term model from a period of only a few days.

Nevertheless, this projection, although irrelevant, has the merit of making us fully aware of the power of the Merge on the issuance of ETH.

Is Ether becoming deflationary?

As stated previously, this will depend on the use of the blockchain. At this precise moment, taking into account the strain on the network, ETH would have inflation of 0.21% per year compared to 3.8% in a PoW model, according to the ultrasound money site.

It is important to emphasize that this data naturally changes from day to day. Thus, in a period of the bull market, with an overuse of the Ethereum blockchain, it is certain that the asset will chain periods of deflation, which is not yet the case for the moment.

In his thread, Sassal also points out that prior to The Merge, miners were creating some downside pressure by selling the product of their labor to cover their charges. This is no longer relevant.

Even better, validators need to lock ETH to run their nodes. This means that the more validators there are, the more ETH will be “blocked”, thus helping to create an environment conducive to higher prices.