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Ethereum Economics
Updated over a week ago

Ethereum Supply

The supply of Ethereum (ETH) is the total number of ETH that has been created and is in circulation. Unlike Bitcoin, the total supply of ETH is not fixed and is not subject to a predetermined algorithm. Instead, the Ethereum protocol has a dynamic supply model that is based on the demand for ETH. This means that the number of ETH in circulation can increase or decrease depending on the activity of the Ethereum network.

The current circulating supply of ETH is around 120 million, as of April 2023. However, unlike Bitcoin, there is no predetermined maximum supply for ETH. Instead, the Ethereum protocol has a built-in mechanism called the "issuance rate" which determines the rate at which new ETH is created.

Ethereum Inflation

The issuance rate of ETH is not fixed and can vary over time. This is because Ethereum has a unique monetary policy that is designed to balance the needs of network security and transaction demand. In general, the issuance rate of ETH decreases over time, which means that the rate at which new ETH is created slows down.

Ethereum transitioned to a proof-of-stake (PoS) consensus mechanism with the introduction of Ethereum 2.0. With PoS, validators stake their ETH to participate in the network, and are chosen to validate transactions based on the amount of ETH they have staked. This means that the more ETH a validator stakes, the more likely they are to be chosen to validate transactions and earn rewards.

The transition to PoS has had a significant impact on the issuance rate of ETH. Unlike the previous proof-of-work (PoW) system, where miners were rewarded with block rewards for validating transactions, validators in the PoS system earn rewards through transaction fees. As more transactions are processed on the Ethereum network, the demand for validators increases, leading to a decrease in the issuance rate of ETH.

Ethereum Burning

Another important factor that affects Ethereum's economics is the burning of ETH through transaction fees. Every time a transaction is processed on the Ethereum network, a small fee is paid in ETH to the validator who processes the transaction. These fees are burned, which means that they are sent to an address where they are permanently locked away and cannot be accessed by anyone.

The burning of transaction fees has the effect of reducing the overall supply of ETH, as the amount of ETH that is burned exceeds the amount of new ETH that is created through block rewards. This burning mechanism is an important part of Ethereum's economics, as it helps to maintain the value and scarcity of ETH over time.

The below image shows the supply of ETH overtime. You can see that in late 2022 the supply growth or inflation reduced after Ethereum transitioned to PoS.

Conclusion

In summary, Ethereum has a unique supply model that is not fixed like Bitcoin. The issuance rate of ETH is determined by the needs of the network and can vary over time. The transition to a PoS consensus mechanism has significantly impacted the issuance rate of ETH, as validators earn rewards through transaction fees rather than block rewards. The burning of transaction fees is an important part of Ethereum's economics, as it helps to maintain the value and scarcity of ETH over time. Overall, Ethereum's unique economics play a crucial role in the success and adoption of the platform.

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