As the second-largest cryptocurrency by market capitalization, any significant change to the Ethereum network draws close attention from the global market. The upcoming major upgrade, known as "The Merge," is scheduled for completion in September. This transition will shift Ethereum from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism, fundamentally altering its tokenomics.
This article provides a data-driven analysis of how Ethereum’s inflation and deflation dynamics are expected to change after The Merge. By examining factors such as block rewards, validator incentives, and the existing burning mechanism, we can better understand the potential supply trajectory of ETH.
Understanding Ethereum’s Current Issuance Model
Ethereum’s monetary policy is influenced by two primary factors: new ETH issuance and ETH destruction. The Merge will mark a complete transition from PoW mining to PoS validation, effectively eliminating mining-based issuance.
Pre-Merge ETH Issuance
During the 2019 Constantinople upgrade, Ethereum’s block reward was set at 2 ETH per block. Additionally, miners who produced "uncle blocks" (blocks that are not included in the main chain) received a reward of approximately 0.09 ETH per block, based on data from blockchain explorers. This brings the total average block reward to about 2.09 ETH.
With an average block time of 14 seconds, the annual issuance from the mainnet is calculated as follows:
- Annual mainnet issuance: ~4,707,874 ETH
- Current total ETH supply: ~119,498,320 ETH
- Annual inflation rate from mainnet: ~3.9%
Beacon Chain Issuance
The Beacon Chain, which serves as Ethereum’s consensus layer, went live in December 2020. Users can become validators by staking 32 ETH. These validators earn rewards for attesting and proposing blocks.
Recent data indicates that the average daily reward for validators is approximately 1,622 ETH. This results in an annualized issuance of about 592,030 ETH, contributing an inflation rate of roughly 0.49%.
Combining both sources, the current total annual issuance is about 4.39%, with the mainnet accounting for 88.84% and the Beacon Chain contributing the remaining 11.16%.
How The Merge Changes ETH Issuance
Once The Merge is complete, PoW mining will cease. This means the mainnet issuance of ~4.7 million ETH per year will disappear, leaving only the Beacon Chain’s annual issuance of ~592,030 ETH. This reduction alone establishes a foundation for potential deflation.
The Role of EIP-1559 in ETH Burning
In August 2021, the London upgrade introduced EIP-1559, a fee market reform that includes a mechanism for burning ETH. Under this proposal, users pay a base fee for transactions, which is burned, while optionally tipping miners for faster inclusion.
Over the past year, the average base fee has accounted for about 70% of total transaction fees. During this period, a total of 2,511,003 ETH has been burned, equivalent to 2.1% of the total supply annually.
Projected Post-Merge Inflation/Deflation Rate
After The Merge, only the Beacon Chain will issue new ETH—approximately 0.49% per year. If the burn rate continues at an annualized rate of 2.1%, the net effect would be:
0.49% (issuance) - 2.1% (burn) = -1.61%
This implies a deflationary supply trend, reducing the total circulating supply of ETH over time.
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Frequently Asked Questions
What is Ethereum’s Merge?
The Merge refers to Ethereum’s transition from Proof-of-Work to Proof-of-Stake. This upgrade eliminates mining and replaces it with staking, reducing energy consumption and changing how new ETH is issued.
How does EIP-1559 contribute to deflation?
EIP-1559 burns a portion of transaction fees instead of giving them to miners. If the amount burned exceeds new ETH issuance, the network becomes deflationary.
Will Ethereum definitely be deflationary after The Merge?
It depends on network activity. During periods of high transaction demand, more ETH is burned, increasing the likelihood of deflation. During low activity, issuance may slightly exceed burning.
What happens to miners after The Merge?
Miners will no longer be able to earn block rewards on Ethereum. Many are expected to migrate to other PoW blockchains or transition to validators in the PoS system.
How are staking rewards calculated?
Validators receive rewards for proposing and attesting to blocks. Rewards vary based on overall staked ETH and validator performance.
Is the burn rate sustainable long-term?
The burn rate correlates with network usage. As Ethereum grows and scales, transaction volume—and therefore burn rate—may increase, reinforcing deflationary pressure.