Nick Chong · 4 days ago · 2 min read · Insights via Grayscale Investments
Ethereum › Analysis
Will the Decline in Ethereum Supply Inflation to Near 0 Percent by 2022 Positively Benefit ETH?
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Last year, the inflation rate of ether, the native cryptocurrency of Ethereum (ETH), was around 17 percent. By 2022, it is expected to drop to near zero as the inflation rate continues to decline.
Ethereum researcher Eric Conner explained that the release of every major hard fork or solution, such as Constantinople and Casper, will drop the inflation rate of ether by large margins.
Here's the updated Ethereum supply/inflation graph. This assumes:
-EIP-1234 in November via Constantinople hard fork
-Hybrid Casper in 2020 (0.6 ETH/block to PoW miners, 0.22 ETH/block to PoS stakers)
-Full Casper in 2022 (0.22 ETH/block to PoS stakers). pic.twitter.com/qsl3rhY922
— Eric Conner (@econoar) September 4, 2018
Importance of Inflation Rate Drop
In 2014, Ethereum co-creator and ConsenSys CEO Joseph Lubin explicitly explained the purpose of the inflation in the supply of ETH.
Lubin stated that while the supply of ETH increases based on a fixed inflation rate, the rate declines year-after-year, which does not affect the market valuation of ETH by increasing its supply.
“New participants in the system will be able to purchase new ETH or mine for new ETH whether they are living in the year 2015 or 2115. We believe we have a achieved a good balance between the two goals of fostering inclusiveness and maintaining a stable store of value. And the constant issuance, especially in the early years, will likely make using ETH to build businesses in the Ethereum economy more lucrative than hoarding speculatively.”
For Ethereum and other smart contract protocols like Cardano and EOS, it is important that the circulating supply of native tokens remain large so that decentralized applications (dApps), developers and projects can acquire enough tokens to support their operations.
The primary use case of ETH is its ability to operate as gas to fuel and process smart contracts. Without ETH, it is extremely impractical for dApps and tokens launched on top of Ethereum to process information.
As CryptoSlate reported this week, a new proposal developed by the Ethereum open-source community will soon place a hard requirement on block producers to cover the minfee with ETH, which will essentially prevent the utilization of tokens to cover gas instead of ETH.
In March, Ethereum co-creator Vitalik Buterin stated that the Ethereum network will slash the inflation rate of ETH by 90 percent to a mere 0.5 percent a year.
“Currently, an expected value is 10 million ETH staking at 5 percent interest, which is 500,000 ETH per year (~0.22 ETH per block),” Buterin wrote on ETH research, adding that the interest will be reduced to 0.22 ETH per block–down from 3 ETH per block as of September 2018–leading to a yearly inflation rate of 0.5 percent.
Inflation Rate Drop is Certainly Good For ETH
Earlier this year, Darryl Morris, an independent Ethereum developer, stated that the implementation of a fixed supply or a supply that rises at a slow rate will only benefit early investors. Fixed supply leads to higher demand and directly benefits early investors, according to Morris.
“What I would like to see in regard to issuance is a dynamic that follows and fosters adoption of the platform itself and not just the currency. This adoption is a long-term trajectory, which should be as fair as far as cost to future generation as it is to us. My fear is that a FOMO inducing hard caps will disadvantage those future adopters.”
The economics and supply around Ethereum and other smart contract blockchain networks are significantly more complex than payment-focused blockchain networks like Bitcoin because the community needs to consider the entrance of new projects and developers in the market that would like to leverage the network to create large-scale applications.