Ethereum is the second-largest cryptocurrency after Bitcoin, with a market capitalization of over $200 billion. Unlike Bitcoin, which has a fixed supply of 21 million coins, Ethereum has no hard cap on the total number of Ether that can be created. However, Ethereum does employ various mechanisms to control the rate at which new Ether enters circulation and to reduce overall inflation over time. Understanding Ethereum’s supply schedule and scarcity mechanisms is critical for assessing its value proposition as a store of value asset.
How Is Ether Created and Distributed?
There are two main ways new Ether is introduced into circulation:
Mining Rewards
Like Bitcoin, the Ethereum blockchain is secured through proof-of-work mining. Miners who successfully verify blocks of transactions are rewarded with newly minted Ether. Currently, the block reward is 2 ETH per block, which is generated approximately every 15 seconds.
Staking Rewards
With the Ethereum 2.0 upgrade in 2020, a proof-of-stake mechanism was introduced. ETH holders can now “stake” their coins to help validate transactions, earning staking rewards in the process. This provides another way to distribute newly created Ether over time, while also securing the network.
In the initial years after Ethereum’s launch in 2015, mining rewards resulted in a rapid growth in Ether supply, with annual inflation peaking at around 20% in 2017. However, issuance has trended downwards due to programmed reductions in the block reward amount.
Ethereum’s Supply Schedule
Unlike Bitcoin, Ethereum does not have a fixed cap on total supply. Instead, an annual maximum issuance rate is defined, with new Ether issuance expected to trend lower over time. Here are some key details on Ethereum’s supply schedule:
- Current annual issuance rate: Approximately 4.5%
- Block rewards: Currently 2 ETH per block, reduced by 10% every 6 months. Will reach 0.3 ETH per block around 2028.
- Staking rewards: Variable based on amount staked and network economics. Currently approximately 4.1% annually.
- Perpetual inflation: After block rewards end, staking rewards will continue in perpetuity, sustaining a low perpetual inflation rate.
- Monetary policy: Maximum issuance is governed by rough guidelines, allowing flexibility to change based on network needs.
Under this issuance schedule, the rate of new Ether creation will slowly trend lower over time, even as the total Ether supply continues growing indefinitely.
Impact on Scarcity
The lack of a supply cap means Ether cannot be considered truly scarce like Bitcoin. However, Ethereum’s monetary policy does limit inflation rates over time. Here are some projections on long-term scarcity:
- By 2025, annual issuance is projected to fall to around 1-2% of total supply.
- Annual issuance as a percentage of total supply will likely stabilize between 0.5-1% in the long run.
- New issuance will become relatively small compared to total Ether in circulation.
- Lost or inactive ETH will reduce liquid supply available on the market.
- As growth of Ether slows over time, existing ETH will become scarcer and more valuable.
So while unlimited Ether issuance may dilute scarcity compared to Bitcoin, network activity and loss of coins will counterbalance this to produce eventual deflationary pressure.
Criticisms of Ethereum’s Supply Model
Ethereum’s lack of a supply cap has drawn criticism from some investors and commentators:
- No fixed scarcity – Without a cap, Ether cannot serve as hard money and limits its potential as a store of value.
- Dilution of value – Perpetual new issuance may dilute the value of existing Ether holdings over time.
- Uncertain future issuance – Flexible monetary policy creates uncertainty over long-term rates of inflation.
- Miner centralization risks – No issuance cap means miners continue controlling Ether supply forever.
- Constraint on staking returns – High inflation reduces staking yield, limiting appeal of staking for investors.
Proponents argue that perpetually low inflation acts as a security tradeoff, while still allowing Ether to hold value well into the future. However, critics counter that uncontrolled supply will prevent Ethereum from rivalling Bitcoin as digital gold.
Future Possibilities for Ethereum’s Monetary Policy
While Ethereum currently has no supply cap, there are proposals to introduce more fixed issuance schedules or caps in the future:
- EIP-960 – Proposal to implement a fixed annual monetary policy with capped maximum issuance. Could provide more predictability over long-term supply.
- Fee burn – Burning a portion of network fees would reduce net issuance. If combined with fixed issuance, this could produce deflationary effects.
- Capped supply – Introducing a hard cap on total Ether issuance has been proposed. However, this would require radical changes to Ethereum’s economics.
- Governance-driven flexibility – On-chain governance may allow Ethereum stakeholders to extend or adjust the issuance model over time.
While no concrete policy changes are imminent, it’s possible Ethereum’s monetary policy could evolve in the future as pressures around scarcity and staking rewards emerge. The programmatic flexibility and open governance structure of Ethereum makes a future supply cap theoretically achievable.
Conclusion
Ethereum’s lack of a supply cap and perpetual staking rewards make Ether fundamentally different from Bitcoin when it comes to scarcity. However, issuance rates will trend lower over time as the Ethereum economy grows. For Ether to solidify itself as a digital store of value, enhancing and clarifying its long-term scarcity may be necessary. While unlimited supply raises concerns, active development and governance of Ethereum’s monetary policy means potential for greater predictability and stability of Ether’s scarcity profile in the future.
FAQ
Here are some frequently asked questions about Ethereum’s supply and scarcity:
What is the main difference between Bitcoin and Ethereum’s supply models?
The main difference is that Bitcoin has a fixed supply cap of 21 million coins, while Ethereum has no predetermined cap and allows perpetual new Ether creation.
How is new Ether introduced into the system?
New Ether is introduced through both mining block rewards and staking rewards. The amounts from both are algorithmically controlled to manage overall inflation.
Can Ethereum’s monetary policy change in the future?
Yes, Ethereum governance allows for monetary policy changes through Ethereum Improvement Proposals (EIPs) and decentralized stakeholder votes. So future supply schedules could theoretically look different.
Does unlimited supply mean Ether cannot hold value well?
Not necessarily. As long as annual inflation rates remain low and predictable, Ether can still function as a valuable digital asset and store of value long-term.
Could Ethereum implement a supply cap in the future?
Implementing a hard cap on Ether issuance is theoretically possible through changes in protocol rules. However, radical economic changes would be required, so a supply cap is unlikely in the near future.