ETH’s monetary policy

Wonder

1. Why does a network with no fixed supply cap sometimes see its total amount of ETH shrink?
2. How can a single protocol upgrade shift an asset from deflationary to inflationary within months?
3. What distinguishes a monetary policy that is a mathematical constant from one that is a political outcome?

Explore

1. Ethereum’s supply mechanics diverge fundamentally from Bitcoin’s. While Bitcoin adheres to a fixed halving schedule, Ethereum has no hard-coded maximum supply. Instead, its total issuance is determined by the rewards paid to validators for securing the network under Proof-of-Stake. This design allows the protocol to adapt to changing conditions, but it also means that the rules governing money creation are subject to modification through consensus and upgrades, making the supply a variable rather than a constant.
2. The London upgrade, activated on 5 August 2021 via EIP-1559, introduced a base fee mechanism that burns ETH. This burn acts as a deflationary counterweight to issuance. When network activity is high and transaction fees are substantial, the amount of ETH destroyed can exceed the amount issued to validators. During such periods, the net supply of ETH shrinks, a condition supporters termed ‘ultrasound money,’ where the asset becomes scarce through usage rather than fixed allocation.
3. The transition to Proof-of-Stake in September 2022, known as The Merge, drastically reduced issuance by ending block rewards for miners and replacing them with lower staking rewards. Combined with EIP-1559 burns during periods of high demand, this led to a net decrease in supply. By March 2024, the total ETH supply had fallen to approximately 120 million units, marking a significant deviation from the inflationary trajectory typical of most digital assets and demonstrating the tangible impact of protocol-level changes on monetary dynamics.
4. The Dencun upgrade, launched on 13 March 2024 with EIP-4844, introduced ‘blob’ space for Layer 2 rollups to post data cheaply. This shifted transaction activity off the mainnet, reducing base fees and consequently lowering the burn rate. As burns diminished while issuance remained steady, Ethereum’s supply turned inflationary again. The annualized growth rate peaked around 0.74% in October 2024. Despite these fluctuations, the net change in supply since The Merge remains roughly +1 million ETH, or about 0.2% per year.
5. This history illustrates that Ethereum’s monetary policy is a series of deliberate choices rather than an immutable law. Between 2015 and 2024 issuance rules changed several times: the block reward fell from 5 to 3 ETH in 2017 (Byzantium) and to 2 ETH in 2019 (Constantinople) before The Merge replaced it. Each change reflects the community’s evolving priorities regarding scalability, security, and deflationary pressure. Unlike Bitcoin’s schedule, which has not changed since inception, Ethereum’s supply parameters are dynamic outcomes of governance processes, requiring participants to track protocol changes to understand current scarcity conditions.
6. To verify these shifts, consult a real-time supply tracker such as ultrasound.money or Etherscan. Observe the daily issuance rate and the cumulative burn metrics over different timeframes. Note how specific dates corresponding to major upgrades correlate with sudden changes in the slope of the supply curve. This direct inspection confirms that ETH’s scarcity is not static but responds to both network usage patterns and the technical decisions made by its developers.

Key facts

Exercise nine, six, three, one

Fact check

Dates, figures and claims checked against the published sources listed below.

• Ethereum Foundation, 'Dencun Mainnet Announcement' (27 Feb 2024)
• ultrasound.money supply data
• V. Buterin, 'Ethereum: A Next-Generation Smart Contract and Decentralized Application Platform' (2013/2014)