Ethereum’s Informal Supply Cap: Aligning with Vitalik’s Vision and Impacting Market Dynamics

Ethereum network with informal supply cap, vibrant transactions in golden hues, light casting a hopeful glow, futuristic abstract art style, deflationary pressure visualized, EIP-1559 and the Merge subtly represented, nuanced balance between optimism and uncertainty, dynamic and evolving mood.

Ethereum has long been criticized for its lack of a formal cap on the supply of ether, its native cryptocurrency. However, recent events have sparked a reconsideration of this stance, and some now argue that the network is coming close to instituting an informal cap thanks to the ongoing burn of ether tokens. According to data from Ultrasound Money, the total ether supply peaked at 120.5 million ETH in March and has decreased by around 100,000 ETH since then.

Interestingly, this milestone aligns with a proposal made by Ethereum co-founder Vitalik Buterin in 2018, suggesting a hard cap of 120 million ETH. Despite being initially dismissed as unworkable, the subsequent developments in Ethereum’s technology and market dynamics have brought the network closer to achieving this informal cap.

A significant factor contributing to this development is the introduction of Ethereum Improvement Proposal 1559 (EIP-1559), which implemented a fee-burning mechanism for transaction fees. This has helped to reduce the rate of issuance and bend the supply curve towards deflation. In addition, the Merge – a shift from proof-of-work to proof-of-stake consensus mechanism – further contributed to the deflationary pressure on ether’s supply.

The burn mechanism introduced by EIP-1559 has been successful in making fees more predictable, addressing a long-standing issue in Ethereum’s usability. Additionally, it has generated a side benefit of creating a de facto supply cap for ether. In a 58-page research paper, Tim Roughgarden noted that “burned fees are effectively a lump sum refund to ETH holders, the value of ETH would be tied directly to the intensity of network usage.”

The ongoing burn of ether tokens and the increasing amount of ether staked have led to supply deflation for five consecutive months. As a result, ether’s inflation rate has fallen 1.07% since the burning process began, currently standing below Bitcoin’s inflation rate of 1.74%. This trend may continue, further strengthening the informal cap on ether supply.

While Ethereum’s informal supply cap is promising for supporters, it is essential to remember that this is not an officially implemented hard cap. Instead, it is an observation generated by market dynamics and the ongoing development of the Ethereum network. The future may bring more changes to Ethereum’s supply mechanism, and the debate over the supply cap will likely continue as the network evolves. Nonetheless, it is fascinating to see how the network’s trajectory aligns with the once-dismissed idea of an ether supply cap.

Source: Blockworks

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