Five months after ethereum (ETH) transited to a proof-of-stake consensus system via the Merge, the network’s inflation has drastically dropped, on-chain data on Jan. 16 reveals.
Ethereum inflation falling
A snapshot shared on Twitter reveals that the network has distributed 260 ETH, worth approximately $360,000, at spot rates.
This contraction in inflation is several folds lower than what ethereum would have if it was using proof-of-work to process transactions and secure its infrastructure using miners. In the previous dispensation, the amount minted by ethereum for miners would have stood at 1,439,450 ETH, or $2.2 billion.
The development is massive for ethereum, especially ETH holders. A big concern over the years has been the rapid pace of ETH inflation.
Since ethereum, unlike bitcoin, has no cap on supply and is thus inflationary, holders and investors worried that this could devalue their assets over time. Since launching, ETH’s total supply has risen from 100 million to more than 122 million since mid-January 2023.
However, following the shift from a proof-of-work system, criticized for being unsustainable and limiting to scalability, ethereum’s inflation has been dropping. As an illustration, the network’s inflation during proof-of-work stood at around five percent annually.
The effect of the merge
Inflation would have been higher was it not for the Constantinople upgrade. Here, miner rewards were dropped from 3 to 2 ETH in what was called Thirdening. In the pre-Merge era, ethereum added 13,000 ETH every day. As dictated from the protocol level, 2 ETH were added to circulation every 13 seconds.
The drop in ETH inflation over the last few months came amid unfavorable conditions in 2022. Throughout 2022, on-chain activities rapidly contracted as asset valuation plunged. For context, ETH prices more than halved after soaring to over $4,600 in early November 2021. It fell to register multi-month lows in 2021, dropping to as low as $1,100. This severely impacted activity as DeFi and NFT users scampered to safety.
Apart from dropping inflation, there is over $25b worth of ETH locked in the official Beacon Chain deposit address, per on-chain data. As ethereum developers initiated the migration to proof-of-stake via the Merge, users locked their 32 ETH to operate validator nodes and earn staking rewards. The over $25 billion ETH could be unlocked in Q1 2023. Before then, ETH inflation would be lower and expected to shrink in the months ahead.