The Ethereum supply is currently growing at an annual rate of 0.5%. This results from a 1% issuance rate minus a 0.5% burn rate. To achieve net deflation again, either issuance must decrease or burning must increase. Both scenarios are likely to occur.
ETH vs. BTC: A High-Stakes Monetary Contest
Before delving into Ethereum's issuance and burn mechanics, it’s essential to understand the broader context of the competition between ETH and BTC.
Native internet currency represents a massive opportunity, potentially worth tens of trillions of dollars. Monetary premium rarely accumulates on such a large scale. For society to coordinate around a digital asset, it must be truly compelling, with outstanding properties including credible neutrality, security, and scarcity.
At first glance, monetization appears to be a zero-sum game. In the digital age, gold is being demonetized. Only two candidates are positioned to replace it and win the race for global internet money: Bitcoin (BTC) and Ethereum (ETH). No other assets come close. Decisive factors will include credible neutrality, security, and scarcity.
Since The Merge, ETH has become scarcer than BTC. Notably, while the BTC supply has increased by 666,000 coins (worth approximately $66 billion), the ETH supply has remained stable. Currently, the BTC supply grows at 0.83% per year, which is 66% faster than ETH's growth rate. For those looking ahead, ETH's supply is poised to decrease again.
Scarcity is important, but the contest for internet money may ultimately be decided by security. Ironically, Bitcoin’s famous 21 million hard cap is its potential Achilles' heel. BTC issuance will eventually drop to zero—a core part of its social contract. After several halvings, new issuance will become negligible.
Consider this data: over the past week, only 1% of miner revenue came from Bitcoin transaction fees, while 99% came from block rewards (issuance). This is still the case after four halvings reduced issuance by 16x and despite 15 years of efforts to build transactional utility on Bitcoin.
Some argue the Bitcoin blockchain is becoming outdated. A persistent 51% attack on Bitcoin is estimated to cost around $10 billion and require 10GW of power. For a nation-state, this cost is trivial. Texas alone can produce 80GW of power. BTC's security ratio is 200:1, meaning a $2 trillion asset is secured by $10 billion in economic security.
Any shortable instrument related to BTC mining creates an incentive for a 51% attack. There is $20 billion in Bitcoin mining company stock—these equities could be instantly "nuked." There is $40 billion in BTC open interest—direct short exposure. This doesn't even include the potential short exposure through $100 billion in ETFs and $100 billion in MicroStrategy (MSTR).
Could BitVM solve the fee problem? Any BitVM bridge would create a new incentive for a 51% attack on Bitcoin. An attacker could censor fraud proofs during the challenge period and drain the bridge. Ironically, BitVM could be seen as a direct attack vector on Bitcoin itself.
If the BTC price increases 10x, surpassing gold, will it remain secure? Assume this happens within the next 11 years. BTC would become a $20 trillion asset, but due to three more halvings, issuance would shrink by 8x. The security ratio would exceed 1000:1. This is likely untenable, especially as BTC becomes more institutionalized, liquid, and easier to short. Imagine $1 trillion in perpetual open interest backed by only $10 billion in economic security.
Can Bitcoin fix itself before it's too late? Bitcoin is the epitome of blockchain rigidity. Could it adopt a 1% tail emission? Perhaps switch to Proof-of-Stake and rely on fees? That would be heresy to its core supporters. Maybe change the Proof-of-Work algorithm? That nuclear option wouldn't help. What about larger blocks and selling data availability at scale? The community already fought a holy war for small blocks.
If you've read this far and understood the arguments, congratulations. Even today, very few people grasp the long-term implications of Bitcoin's PoW model and its impact on the BTC asset. This represents a potential alpha opportunity for those with patience. The timeline isn't one month, or even one year—it's a decade.
Speaking of long timeframes, proposals to lock up BTC for 20 years, like those suggested by Senator Lummis, seem reckless—Bitcoin could be obsolete by then. Worse, if the U.S. held trillions in BTC, it would directly incentivize adversarial nations to execute a 51% attack. Contrary to popular belief, Bitcoin is not resistant to nation-states—countries like Russia could easily launch an attack.
The Mechanics and Challenges of ETH Issuance
Returning to Ethereum, the current issuance curve is problematic. Unfortunately, like Bitcoin's emission schedule, Ethereum's issuance design is also flawed. It guarantees a 2% tail Annual Percentage Rate (APR), even if 100% of ETH is staked. Since the cost of staking is far below 2%, every rational ETH holder is incentivized to stake.
When most ETH is staked, several negative outcomes emerge:
- ETH Displacement: Liquid staking tokens (LSTs) like stETH and cbETH replace native ETH as the primary form of collateral. This injects systemic risk into DeFi (custody risk, slashing risk, governance risk, smart contract risk). This displacement also weakens ETH's role as a unit of account and has further knock-on effects on its monetary premium.
- Real Yield and Taxation: Real yield, which is yield adjusted for supply growth, declines as more ETH is staked. When 100% of ETH is staked, all holders are diluted equally. Worse, income tax is levied on nominal gains. It would be a tragedy if no stakers enjoyed positive real profits, while all ETH holders faced billions in annual sell pressure from taxes.
The issuance curve should facilitate the discovery of a fair issuance rate through staker competition—not arbitrarily set a 2% floor. This means the curve must eventually decline and return to zero as the staking ratio increases. One proposed solution is "Croissant Issuance."
Croissant Issuance is a simple semi-ellipsoid curve with two parameters:
- Soft Cap: The staking ratio at which issuance drops to zero. A 50% soft cap feels credible, neutral, and pragmatic.
- Peak Issuance: The theoretical maximum issuance burden on ETH holders. An arbitrary round number (e.g., 1% per year) suffices, as the final rate would be market-determined.
Researchers at the Ethereum Foundation have studied issuance for years. A rough consensus is forming that the current curve is broken and needs to change. Guiding a social layer consensus change for issuance is not easy. This presents an opportunity for champions to emerge, address the issue, and coordinate a mainnet change in the coming years.
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The Dynamics of ETH Burning
A sustainable way to burn significant amounts of ETH is through scaling data availability (DA). Having 10 million TPS where each transaction pays $0.001 for DA is far more profitable than having 100 TPS where each transaction pays $100.
It wouldn't be surprising to see hundreds of ETH burned daily from blobs this year. This burn rate could then suddenly plummet again with the introduction of Peer Data Availability Sampling (DAS) in the Fusaka fork.
Yes, EIP-4844 introduced blobs, which initially lowered the total burn rate due to increased supply—a natural function of supply and demand. As demand for DA catches up with supply, expect significant blob burn. The upcoming Pectra hard fork will double the number of blobs. The short-term goal is growth, and significant growth is anticipated.
Over the next few years, a cat-and-mouse dynamic between supply and demand is expected until full Danksharding is deployed. It's a distinct possibility that we see hundreds of ETH burned daily from blobs, only for that burn to crash again with Peer DAS in the Fusaka fork.
Looking further ahead, this is about building infrastructure for decades and centuries to come. The fundamentals will play out over many years. Whether it's Bitcoin security, ETH issuance, or ETH burn, patience and conviction are key.
Frequently Asked Questions
What is the current ETH issuance rate?
The current ETH issuance rate is approximately 1% per year. This is the amount of new ETH created and distributed to stakers as rewards for securing the network.
How does EIP-1559 contribute to ETH burning?
EIP-1559 introduced a base fee for transactions that is dynamically adjusted based on network congestion. This base fee is permanently burned (destroyed) instead of being paid to miners/validators, effectively reducing the overall ETH supply over time.
What is the difference between Bitcoin's and Ethereum's monetary policy?
Bitcoin has a fixed, predetermined supply cap of 21 million coins and no built-in mechanism to burn coins. Ethereum has a dynamic, uncapped supply but incorporates a burn mechanism (EIP-1559), making its net issuance variable and potentially deflationary depending on network activity.
What are the risks associated with liquid staking tokens (LSTs)?
LSTs introduce several risks, including custody risk (relying on a third-party operator), slashing risk (potential penalty for validator misbehavior), smart contract risk (bugs in the LST contract), and governance risk (centralized decision-making by the LST provider).
What is Data Availability Sampling (DAS) and how does it relate to scaling?
Data Availability Sampling is a critical technology for Ethereum scaling solutions like Danksharding. It allows light nodes to verify that all data for a block is available without downloading the entire block, enabling the network to safely handle a massive increase in block size and throughput.
Could Ethereum's issuance policy change in the future?
Yes, Ethereum's issuance policy is not set in stone and can be changed through a community-led Ethereum Improvement Proposal (EIP) and a network upgrade. There is active discussion among researchers about optimizing the issuance curve for long-term network health.