According to a simulation by ultrasound, Ethereum’s supply could shrink by 1% per year after the transition to ETH 2.0.
Towards the reduction of ETH supply
The simulation is based on three adjustable parameters. By setting these three parameters to 10 million ETH in staking, 50 Gwei of average base gas, and the transition to Proof-of-Stake on 31 March 2022, starting in April 2022 the supply of ETH could start to shrink.
After a peak of 119.3 million ETH, it could fall to 118.6 million at the end of 2022, to 117.4 at the end of 2023 and to around 116 million at the end of 2024.
At present, however, the supply of ETH is growing steadily, although it has started to increase less since the London hard fork.
This is only a simulation with arbitrarily set parameters, and the results obviously change depending on the base gas chosen. Moreover, the base gas varies over time, and the simulation does not take this into account.
According to other estimates, the reduction could actually be higher, perhaps even double.
Ethereum is currently on pace for -2% supply shrink a year once the PoS merge takes place in a few months.
— eric.eth (@econoar) October 26, 2021
Ethereum supply, what changes with version 2.0
ETH does not have a preset limit for its supply, as does BTC with its 21 million units, however, the burning of part of the fees could not only prevent ETH’s supply from growing forever, but perhaps even decrease it significantly.
In fact with the move to PoS, should gas levels remain similar to the current ones, the new blockchain will start to burn more ETH than will be created for each new block.
For now, the London hard fork has reduced the issuance of new ETH by 57%, thanks to the destruction of almost 630,000 of the more than 1.1 million ETH that were distributed as rewards to miners.
With the move from Proof-of-Work to Proof-of-Stake, miners will disappear, and ETH created out of thin air to reward them will be replaced by presumably fewer ETH created to reward stakers who validate blocks instead of miners.
Staking rewards are 5 to 10 times lower than mining rewards, so fewer will be created for every single block validated. Furthermore, staking does not require any large investments in electricity like mining does, so it will not be a problem for stakers to accept lower rewards.
Doubts about the move to PoS
The question remains:
- whether the number of blocks validated on average in the unit of time will remain the same,
- whether the fees burned will remain high,
- whether the fees paid by users will remain at the same levels,
- how many ETH will be locked in total for staking.
As of today, it is impossible to say with certainty how this will turn out, but the possibility that the supply of ETH may start to fall seems to be there. However, it is worth mentioning that even before the London hard fork, some people suggested that the supply could basically stop growing, but so far it has only slowed down.