Ethereum is the world’s second-largest cryptocurrency. However, it is a lot more diverse and has a lot more real-world applications (e.g. DeFi) than the more popular Bitcoin. That said, most novice crypto enthusiasts do not know a lot about Ethereum, and one of the most popular questions that they ask is whether or not it has a fixed supply.
Ethereum does not have a fixed supply. It does have a yearly limit on the increase in its supply, but the total coins in circulation can theoretically rise to infinity. That said, there are developers working on the Blockchain to stop this problem and dramatically reduce the Ethereum inflation rate. There is even a proposal to hard cap Ethereum’s supply.
How Does the Ethereum Supply Work?
Unlike Bitcoin whose supply is capped at 21 million, Ethereum can go much higher.
In fact, when Ethereum was launched, there were a total of 72 million coins already available. 60 million of the currency was available at the pre-sale and a further 12 million was used to create a development fund.
Beyond that, the supply of the currency was capped at a maximum of 18 million ETH per year. This means that Ethereum decreases its relative inflation every year. For example, if there were 100 million ETH in circulation, an 18 million increase would account for 18% inflation. However, the inflation would be less the next year because there would now be more ETH in circulation.
That said, the actual rate at which the ETH supply has increased is far less than its maximum cap of 18 million. As of right now, it is estimated that the Ethereum supply is increasing at roughly 10% every single year.
An inflation rate of 10% is considered to be very high by many, and that includes the Ethereum founder and the development team. As such, Let’s take a look at how Ethereum may be able to address its supply issues, and how the currency may change in the future.
Ethereum’s Supply Could One Day Be Capped
All the way back in 2016, the founder of Ethereum Vitalik Buterin projected that the supply of Ethereum would rise at a rate that would only make it cross 100 million sometime during the next century.
Of course, he made a crucial mistake somewhere in his calculation. As of February 2021, the total Ether in circulation is almost 115 million.
When Vitalik realized that he had made a mistake, he created an Ethereum Improvement Proposal that suggested that the supply of Ethereum be capped at around 120 million ETH, or alternatively 144 million ETH if it was not feasible to cap it at 120.
This led to a huge debate on the specifics of Ethereum and whether or not the supply of a perfect currency should be capped. Some even disregarded the EIP as an April Fool’s joke, since it was posted on April 1st, 2018.
The EIP has not been accepted as of yet, and one reason for that is that most people expect the problem to solve itself through the Casper update.
How a Switch to a PoS Consensus Protocol Could Solve Ethereum’s Supply Issues
One of the most long-awaited updates to the Ehtereum Blockchain is its switch to a Proof of Stake consensus protocol. Those looking for a detailed guide on how PoS differs from PoW can read the official FAQ.
When it comes to supply, the Casper update (the update that introduces PoS) will make it not only cheaper to transact Ethereum, but it will also improve the speed of the transactions. More importantly, it will reduce the amount of Etheruem generated by each block.
When questioned about the Casper update and inflation, Vitalik predicted the inflation to be somewhere between 0.5-2%. However, considering that he has been wrong about the supply of Ethereum before, you should take this with a grain of salt.
Partial Fee Burning Could Further Reduce Inflation
One thing that may be a part of the Casper update (or maybe introduced further down the line) is a feature that makes users burn a part of the fee whenever they make a transaction.
This would mean that every time you send or receive Ethereum, a small portion of it will never be recovered. This proposal has been very controversial, as it would be the miners that would lose out from this change the most.
However, this would help further push the inflation rate down. According to Vitalik’s prediction, the inflation could be close or even below 0% (which would cause deflation).