What is Ethereum's monetary policy?

Unlike Bitcoin, Ethereum's supply schedule wasn't etched in stone from genesis. While for Bitcoin the maximum supply, which is set at 21 million coins, is enshrined as a defining characteristic of the cryptocurrency, there is no upward limit to the total amount of ETH that can be issued. Instead, the issuance rate is subject to change along Ethereum's governance processes. Thus Ethereum's monetary policy can be said to be in the hands of the Ethereum community.

​ Read more: How does governance work in Ethereum?

While Ethereum's monetary policy isn't set in stone, we can nevertheless examine its history and make predictions about its future. To do that, we'll consider the total circulating supply of ETH over time, the rate that new ETH is added to the total supply, and the rate that existing ETH is burned (destroyed) or removed from the total supply.

On 15 September 2022, Ethereum successfully switched from ‘Proof-of-Work’ to ‘Proof-of-Stake.’ This marked a major turning point in Ethereum’s monetary policy. Like Bitcoin, Ethereum used to employ a 'Proof-of-Work' consensus mechanism (although the hashing algorithm differed). In that system, miners who succeeded in extending the Ethereum blockchain by applying computing power to the hashing algorithm were rewarded in ETH, and new blocks were added approximately every 10-15 seconds. ​

Read more: What is Proof-of-Work Bitcoin Mining?

When the Ethereum network launched in 2015, the block reward was initially set to 5 ETH. In other words, 5 ETH were added to the total supply every 10-15 seconds. Considering that the total circulating supply of ETH (ie. the "stock") at that point was relatively small, and that the issuance rate (ie. the "flow") was high, Ethereum started off with a low stock-to-flow ratio. This meant that the out-of-the-gate inflation rate was above 20% on an annual basis. However, as the total supply (stock) expanded, any additional supply would have diminishing impact. In other words, the stock-to-flow ratio increased. After just one year, therefore, the inflation rate had reduced to the low teens (on an annual basis).

Read more: Learn about Ethereum's initial distribution and early supply.

​ At block 4,370,000, which was in October 2017, the block reward (flow) was reduced to 3 ETH in accordance with Ethereum Improvement Proposal (EIP) 649. At this point, annual inflation was less than 10% - and again, as supply (stock) gradually expanded, the relative inflation rate would continue adjusting downward.

​ At block 7,280,000, which was in February 2019, the block reward (flow) was reduced once again, this time to 2 ETH in accordance with EIP-1234. The stock-to-flow ratio thus increased further, corresponding to an annual inflation rate of 4.5% at the time.​

Another important point to consider about Ethereum's monetary policy relates to EIP-1559 which, as of Aug 2021, introduced a mechanism for burning (destroying) a portion of the ETH that's already in circulation. The volume of ETH that's burned in accordance with EIP-1559 is dependent on the demand for usage of the network's resources, with more ETH being burned as demand increases. This means that, during bouts of intense transaction activity, it's possible for there to be periods when more ETH is burned than created. In other words, Ethereum may experience periods of deflation.

Read more: Get more details on EIP-1559 and how it works.

Finally, Ethereum transitioned away from a Proof-of-Work to Proof-of-Stake consensus model in line with the move towards "Ethereum 2.0," dropping ETH issuance by approximately 90%. Issuance is low enough that in conjunction with the changes made in EIP-1559, it’s possible for Ethereum’s total supply to contract over time.

However, it's important to reiterate that Ethereum's monetary policy is ultimately decided by the Ethereum community along its governance process. In that regard, there are many factors to consider. Ultimately, this means that we can't accurately predict Ethereum's future supply rate.

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