Ethereum finally deflationary – It has been almost a month since the network Ethereum made its transition from Proof of Work to Proof of Stake. The change in consensus had little impact on network performance. Nevertheless, this one had a major impact on the monetary issuance of ETH. This impact is such that Ethereum finds itself deflationary.
The Merge: the concrete changes
On September 15, the protocol Ethereum has done its long-awaited update The Merge. In practice, The Merge has moved Ethereum from a network in Proof of Work to a network in Proof of Stake.
During this transition, the execution layer (dApps, DeFi, etc.) of the Ethereum network was hooked up to the consensus layer. This consensus layer was launched in December 2020 in the form of the beacon chain.
Despite many beliefs, the switch to Proof of Stake was not intended to reduce fees. Note, however, that the Proof of Stake has led to a slight decrease in block time. Indeed, block time recorded a down about 9%. Therefore, the number of average blocks produced daily has increased by about 18%.
In addition, The Merge has made it possible toto improve the performance of the solutions second layer and forms a basis for the deployment of future updates.
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Ethereum moves to the deflationary side of the force
Nevertheless, The Merge was highly anticipated by the community regarding its impact on the rate of issuance of the ETH token. Indeed, the abandonment of miners in favor of validating nodes has led to a reduction of ETH token issuance by more than 99%.
Since the deployment of The Merge, only 7,712 new ETH have come to swell the supply maximum. For comparison, during the same time frame, 328,766 ETH would have been created in Proof of Work.
Therefore, the ETH token currently has a negative annual monetary issuance of -0.22%. Result: the production of the ETH token is now deflationary.
Note, however, that the monetary issuance of Ethereum also depends on the use of the network. Indeed, since the deployment of theEIP 1559the Ethereum network systematically destroyed part of the transaction fees. Therefore, if the use of the network were to decrease, the destruction of ETH would also decrease, which would have the consequence of increasing the issuance of ETH.
As an example, taking the current data, the network should issue around 603,000 ETH per year and should destroy around 866,000 ETH per year. In other words, Ethereum should have an annual monetary destruction of approximately 250,000 ETH. In comparison, Ethereum in Proof of Work had currency inflation of around 3.31% per year.
Unfortunately, the transition to Proof of Stake has led to many situations of censorship in block production. An unacceptable situation to which Vitalik Buterin tried to find a solution.
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