You have undoubtedly noticed that the production of ethereum (ETH) has fallen sharply after the Merge. With the transition from Proof-of-Work to Proof-of-Stake, the issuance of new Ethereum as a reward for producing blocks has been sharply reduced. Where there was still an inflation of more than 3 percent per year before the Merge, there is now regular deflation.
we’re so ultra back! pic.twitter.com/bU48hil3gb
— ultra sound money 🦇🔊 (@ultrasoundmoney) January 15, 2023
Ethereum is once again deflationary
It depends entirely on the pressure on the blockchain to what extent we can speak of deflation within ethereum. When the blockchain is busy, transaction costs rise and that is positive for token holders. Part of the transaction costs go on the digital pyre, which means that they are permanently destroyed.
As long as the amount of ether on the stake exceeds the reward validators receive for processing transactions, deflation is in effect. Right now OpenSea, the largest marketplace for non-fungible tokens (NFT), is once again consuming significant amounts of ETH.
OpenSea is closely followed by things like Uniswap V2 and V3, regular ETH trades, and tether (USDT) trades. The image above shows what the exact inflation rate of ether is at the moment. The issuance of new ETH is currently negative, meaning the crypto is deflationary again.
Drop in ETH supply
Measured from the start of the Merge, the supply of ethereum has fallen by 8.62 ETH. How special that is becomes clear when we look at the amount that was added with Proof-of-Work from that moment on. If Ethereum still ran on Proof-of-Work, the protocol would now have produced more than 1.4 million ETH.
The Merge occurred 123 days ago, allowing us to multiply that 1.4 million by a factor of three to measure annual production. So Proof-of-Work would add about 4.2 million ether per year. At current prices, that is more than $ 5 billion worth of ethereum that is no longer on the market. The expectation is that the decreasing supply will have a very bullish effect on the ETH price.