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Is Ethereum Inflationary or Deflationary?

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Those just getting into the world of cryptocurrencies get faced with the expressions “inflationary” and “deflationary”.

In this article, we are going to explore a bit of that and answer what type of coin Ethereum is. Check below to know all about it.

Is Ethereum inflationary or deflationary?

Ethereum is an inflationary cryptocurrency. The network doesn’t count with a hard supply cap, making it impossible for one last block to be mined, and thus miners can mine Ether indefinitely.

Famously, Bitcoin has a limited supply of 21 million. On the other hand, Ether can be mined indefinitely. However, it is essential to know that there is a determinate rate of issuance for the network.

In 2014, 60 million ETH were already available for sale, 12 million ETH went to a development fund, and the annual issuance rate was determined at 18 million per year.

This is a way of limiting how much ETH can circulate even if it is a soft limit rather than a hard limit such as BTC.

Even though the coin is inflationary by allowing miners to keep mining it without reaching the last block, the fact that there is a limited annual supply helps keep things balanced.

Year after year, Ether’s relative inflation rate decreases. Supposing that at the end of one year there is 75 million ETH in circulation, and in the next year 18 million more units are issued, this increases supply by 24%. In the following year, 18 million more are issued, and this only increases supply by 19%.

This way, instead of inflation growing each year, it decreases. It won’t ever reach 0% since new coins will keep being issued, but it can come to a number very close to it.

What Does This Mean For Developers?

Shortly, what the inflationary characteristic of Ether means for developers is that, later, they might want to create a limit of coins that can be issued on the network.

Such an attitude would be to make ETH holders still use their coins as… coins.

Otherwise, an inflationary currency might lose its appeal to the crowd as its price goes down and down.

What Does This Mean For Miners?

If ETH becomes less and less attractive for new users and fewer people want to trade them, there will be fewer transactions available for miners to validate. That, along with the ETH halving, would make it unattractive to mine ETH.

Of course, these considerations are drawn only in a catastrophic scenario where the developers fail to catch up with the situation and do nothing to keep people around. This is very unlikely, as cryptocurrencies aim to replace fiat money completely.

Ethereum’s Future: Ether 2.0

Ethereum’s future is still uncertain, but it is possible to see where it is going right now. In December 2020, Ethereum 2.0’s Phase 0 started. Instead of a proof-of-work network, this new hard fork runs on a proof-of-stake network.

It is an attempt to increase the Ethereum network’s safety, as well as reduce the costs of validating new transactions. Moreover, ETH 2.0 also should be non-inflationary.

One of the options to combat inflation would be to hard fork Ethereum into a new protocol that still depended on proof-of-work miners.

That, however, would only make the coin deflationary without solving other problems such as security and centralization.

Even though cryptocurrencies are purported to be decentralized, the fact that you need good hardware to validate transactions ends up centralizing it in the hands of few. This sort of already happens with BTC, as you need to buy ASIC to mine it.

Transitioning into a proof-of-stake network makes it easier for anyone interested in the cryptocurrency to start validating transactions.

Instead of buying mining rigs, one needs only to acquire a certain amount of coins and hold them to validate new blocks.

Read more about staking

Such PoS proposals for Ether were already going around the internet before Ether 2.0 started its Phase 0.

Ethereum 2.0 is the next step of the Ethereum network. Right now, Phase 0, called the beacon chain, is already live and allows stakers to join the network.

So, right now, a part of the Ether network comprises miners, while another part is made of stakers. Ether 2.0 is currently under development.

Next, the “merge” should eliminate mining from the network.

Will Ether 2.0 Have Limited Supply?

That is a question many people are asking but no one knows. As Ether 2.0 is still under development, many things are still being planned, and little information is being spread.

It is good that developers don’t let rumors spread, so that users, miners, stakers, investors, etc. have less to speculate and prejudice the actual work of developers.

Final Thoughts

The future of the Ethereum network surely looks exciting. Right now, most people are still mining Ether and trading those mined coins.

However, some people are already staking it and contributing to a self-sustained future where electricity consumption gets reduced.