Ethereum Issuance Expected to Decline by '90%' Post-Merge: Why Does a Lower Issuance Benefit Ethereum and Ether?
With the Merge taking place later in 2022, Ethereum issuance is set to decline. Click here to find out why this will benefit the coin.
31 May 2022
27 July 2022
Last year, Ethereum made waves across the cryptocurrency landscape when they announced their swap from the proof of work scheme to the new and improved proof of stake. Becoming a miner in the blockchain had thus far been a tried and tested method to form new blocks, keep transactions secure and to deny double-spends or tampering.
For Ethereum, as well as many other cryptocurrencies, this was a safe and comfortable way to keep the blocks forming. But the negatives were undeniable. Additionally, as crypto becomes more energy conscious through its own endeavours and as a necessity for the world to recognise its use, Ethereum’s adoption of POS seeks to reduce its environmental impact. This is why the POS strategy is both revolutionary and risky. It is an untried and untested scheme. Environmentally progressive, yes, but filled to the brim with unknowable risks.
The benefits, however, such as efficiency and sustainability, have been deemed as worthwhile goals in return for uncertainty. This year, Ethereum has begun to integrate the new system into the old one, in a process which has been dubbed The Merge. At the moment, the current chain, known as Ethereum Mainnet, is still running the proof of work scheme, while a separate Beacon Chain runs in parallel with proof of stake. Soon enough, these two systems will come together to form one progressive proof of stake scheme. In Ethereum’s own words, this is like a spaceship docking into a new system, merging into a single ship with a brand-new engine and a strengthened shell.
So, What Does This Mean For The Future Of Ethereum?
This will have many effects on the Ethereum landscape, not least its ability to now scrap crypto mining and reduce the energy of creating new tokens. But it could also mean Ethereum will step forth as a new leader in market value. At the moment, Bitcoin sits with over 20,000 USDT as the largest and most trusted market coin, while Ethereum is the second most stable currency, sitting below Bitcoin at nearly 1,000 USDT. With the merge taking place later on in the year, however, as well as a rise of decentralised finance and the continued interest in NFTs, Ethereum is expected to overtake Bitcoin’s current market cap and become a frontrunner in coin valuation.
This, in part, will have to do with the amount of ETH which is going to be issued. Under the proof of stake system, a drop of 90% issuance is being projected by blockchain analysts, which would subsequently lead to a reduction of ETH supply by a potential 5% a year. This is a crucial projection, seeing as the pace of ETH supply has already begun to slow. Just last year, an Ethereum Improvement Proposal-1559 brought in a method to burn a portion of miners' fees. $5.78 billion worth of ETH was destroyed, which led to a supply reduction of 65.2%. With 180,000 ETH also withdrawn from centralised exchanges just last year, it is looking like there will be a great decline in the number of coins available in the market.
Why Would a Lower Issuance Benefit Ethereum?
Right now, Ethereum is focusing all of its efforts on creating a successful merge, but additional features also lie in wait for the software. One of these features is the introduction of sharding, which is a new system that splits the infrastructure of Ethereum into smaller pieces. At the moment, Ethereum nodes take up at least five terabytes of space, but with the use of sharding, the system can split a blockchain company’s network into partitions, which helps reduce the slowness and improve the efficiency. This means the Ethereum blockchain will be faster and capable of storing more data, which will scale the platform to support far more users than it currently has.
The result of this will undeniably be felt by the users in question. At this point in time, Ethereum can only handle around thirty transactions per second, but with the upgrades it has in store, that could eventually rise to as many as 100,000 transactions. With the Merge in mind, as well as the drop of 90% issuance, it is very likely that demand for ETH will rise while the supply of ETH declines, which will lead to an increase in the price of Ether itself. By lowering the issuance of currency, Ether will essentially become deflationary in the long term, making it more valuable for the users. This is also backed up by the fact that the Merge has a large following of supporters, with 13 million ETH already deposited into the new, upgraded system.
So How Bright Is the Future For Ethereum?
It is important to remember, however, that these projections may not all come to fruition. While the issuance is set to decline with the new upgrades, the Merge in itself has still not come into full effect, which means its consequences are not fully mapped out. There are still critics who claim the new system will make Ethereum far less secure and far more vulnerable to attacks. If this is the case, then there will likely be fewer users willing to take advantage of a higher-value ETH coin, which will subsequently cut projections of a market cap exceeding the cap of Bitcoin. These are the words of only a few critics, however, and many more analysts have argued that there will be improved security against hacking, due to the fact Ethereum can simply upgrade the network to remove the coins themselves.
Either way, it looks like the 90% decline has every chance of being a positive for the future of Ethereum. If the Merge is a success and the proof of stake system performs in the way it is expected to, then the increase of users conducting transactions with more valued coins will only heighten Ethereum’s presence on the global cryptocurrency stage.
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