A Look at Ethereum Inflation and the Concerns Raised.

September 15, 2022, Ethereum underwent a major upgrade known as the "Merge." This upgrade transitioned the network from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) mechanism. One of the key goals of the Merge was to reduce Ethereum's inflation rate.

However, in the 30 days since the Merge, the supply of ETH has grown by $47 million. This has raised concerns among some members of the Ethereum community, who fear that the network is becoming inflationary again.

What is Ethereum inflation?

Ethereum inflation is the rate at which the supply of ETH is increasing. It is calculated by dividing the amount of new ETH issued each year by the total supply of ETH.

How does Ethereum inflation work?

Under the PoW consensus mechanism, new ETH was issued as a reward to miners for verifying transactions and securing the network. The rate of ETH issuance was set at 2 ETH per block, plus an additional 1.75 ETH per block as a reward for miners who included uncle blocks in their blocks.

Under the PoS consensus mechanism, new ETH is issued as a reward to validators for staking their ETH and securing the network. The rate of ETH issuance is currently set at around 0.52% per year.

Why is Ethereum inflation important?

Ethereum inflation is important because it affects the value of ETH. If the supply of ETH is increasing faster than the demand for ETH, then the value of ETH will decrease. Conversely, if the supply of ETH is increasing slower than the demand for ETH, then the value of ETH will increase.

Why has the supply of ETH grown by $47 million in 30 days?

There are two main reasons why the supply of ETH has grown by $47 million in 30 days:

•Reduced transaction activity: The Ethereum network has seen a significant decline in transaction activity in recent months. This is due to a number of factors, including the bear market, the rising cost of gas fees, and the migration of some users to layer-2 solutions.

•The fee-burning mechanism is not burning enough ETH: The Ethereum network has a fee-burning mechanism that burns a portion of the transaction fees paid by users. This mechanism was designed to reduce the supply of ETH and make it more deflationary. However, the fee-burning mechanism is not currently burning enough ETH to offset the new ETH that is being issued to validators.

Is Ethereum becoming inflationary again?

It is too early to say for sure whether Ethereum is becoming inflationary again. The network has only been running under PoS for a few months, and it is still too early to see the full impact of the Merge on inflation.

However, the fact that the supply of ETH has grown by $47 million in 30 days is a concern. If this trend continues, then Ethereum could become inflationary again.

What can be done to reduce Ethereum inflation?

There are a number of things that can be done to reduce Ethereum inflation, including:

•Increase transaction activity: The more transactions that are processed on the Ethereum network, the more ETH will be burned. This will help to reduce the supply of ETH and make it more deflationary.

•Increase the fee-burning rate: The fee-burning rate can be increased by burning a larger portion of the transaction fees paid by users. This will help to reduce the supply of ETH and make it more deflationary.

•Reduce the amount of ETH issued to validators: The amount of ETH issued to validators can be reduced by decreasing the base issuance rate or by increasing the staking requirement. This will help to reduce the supply of ETH and make it more deflationary.

Conclusion

The fact that the supply of ETH has grown by $47 million in 30 days is a concern. If this trend continues, then Ethereum could become inflationary again. However, there are a number of things that can be done to reduce Ethereum inflation, including increasing transaction activity, increasing the fee-burning rate, and reducing the amount of ETH issued to validators.

Additional thoughts

In addition to the above, there are a few other things to consider about Ethereum inflation:

The Ethereum community is aware of the issue and is working on solutions. The Ethereum Foundation and other developers are working on ways to reduce inflation, such as increasing the fee-burning rate.

Thank you for reading.