Introduction
Following the network upgrade on September 15, Ethereum transitioned from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism, reducing its carbon footprint by an estimated 99.95%.
This shift also fundamentally altered Ethereum’s token issuance dynamics, reducing its daily token supply.
This article explores the new supply and demand dynamics of the PoS Ethereum network and examines whether the network has truly become deflationary.
Pre-Merge Expectations
There was widespread speculation before the Merge that Ethereum would become deflationary. Now, with real data available, we can analyze what has actually happened since the transition.
Many analysts relied on historical data and projections to anticipate Ethereum’s token activity post-upgrade.
A critical factor in these predictions was Ethereum’s earlier major upgrade in August 2021—EIP-1559—which introduced a fee-burning mechanism. This upgrade mandated that the base fees paid in ETH for transactions be burned, effectively reducing the total supply. Many expected Ethereum’s net token issuance to range between 0.5% and 4.5%, depending on network activity, potentially making ETH a deflationary asset.
Post-Merge: Is Ethereum Deflationary Now?
One of the most significant technical achievements in the blockchain space has been Ethereum’s successful transition from PoW to PoS—a process years in the making.
Since PoS functions differently from PoW, we must examine supply metrics to understand Ethereum’s new economic model. This includes analyzing the role of validators, ETH token issuance, and the impact of the EIP-1559 burn mechanism.
Understanding Proof-of-Stake Ethereum: Slots, Blocks, and Epochs
In Ethereum’s PoS consensus mechanism, miners are replaced by validators. The block production and validation process is structured as follows:
The Ethereum PoS blockchain is built around a sequence of slots, each lasting approximately 12 seconds. Each slot represents an opportunity for a validator to propose a new block. Note that not every slot necessarily contains a block.
Every set of 32 consecutive slots is grouped into an epoch. For each epoch, the protocol selects a committee of 128 validators. From this committee, one validator is randomly chosen to propose a block in the upcoming slot.
The remaining validators in the committee then attest that the proposed block and its transactions comply with consensus rules. An epoch is finalized once two-thirds of the validator network confirms it.
Validators
The Ethereum PoS protocol allows validators to join and leave the network. To maintain stability, a queue system regulates the number of validators entering or exiting per epoch, enforcing what is known as a churn limit.
Throughout much of the Beacon Chain’s history, the number of active validators has consistently increased.
The Beacon Chain, launched in December 2020, serves as the coordination mechanism for the new PoS network. It is responsible for creating new blocks, validating them, and distributing ETH rewards to validators who help secure the network.
The blue line in available charts indicates the network’s enforced upper limit, or churn limit, which increases as more validators join. Significant surges in new validators were observed around May–July 2021, September 2021, and May 2022.
On the other hand, some validators have exited the network, either voluntarily or due to penalties for malicious behavior (slashing). So far, 678 validators have voluntarily exited.
The data suggests that the number of validators leaving the network remains relatively low, while new validators continue to join. Despite the prolonged crypto winter and macroeconomic uncertainty, this indicates strong confidence in the future of the Ethereum network—a positive signal.
Validator Staked Balances
To become a validator, a user must deposit at least 32 ETH. The total value staked reflects the sum of all these deposits.
As of now, the total amount of ETH deposited in the network is 13.9 million. We observe a steady growth in ETH deposits. It is important to note that staked ETH cannot be withdrawn until the Shanghai upgrade, scheduled for early 2023. This continued growth, despite the lock-up period, is another encouraging sign of confidence in Ethereum’s future.
Validator Losses
Investors deposited ETH into the Beacon Chain staking contract at various price points. The average deposit price is currently $2,326, significantly higher than Ethereum’s current trading price of around $1,300. This means most validators are facing substantial unrealized losses.
The scale of these unrealized losses is estimated at $13.9 billion.
This situation may hint at what could happen when ETH deposits become withdrawable in 2023. If unrealized losses persist or grow, yet the number of validators continues to rise and selling pressure remains low, it would reflect strong belief in the network’s utility, adoption, and long-term potential. Given that blockchain technology is still in its early stages of global adoption, participant confidence is critical.
Supply Dynamics
To assess Ethereum’s utility, we can analyze the concentration of ETH supply across the network. Greater utility generally leads to higher demand for ETH, increasing buy pressure, making the network more deflationary, and reducing the risk of capital flight during uncertain times.
Available charts offer a perspective on high-concentration ETH supply zones, expressed as a percentage of the circulating supply.
The orange zone represents supply held on exchanges, the red zone indicates supply in smart contracts, and the purple zone shows staked supply held by validators in the Beacon Chain.
A significant portion of the supply is held in smart contracts, meaning that much of the ETH is being utilized—generating network fee revenue and rewards for validators. ETH locked by validators is growing substantially, further reducing liquid supply. In this context, Ethereum is being actively used, both for smart contracts and network security.
Ethereum’s ETH Issuance
The estimated annual ETH issuance in PoS Ethereum is a function of the number of validators. This means that as more validators participate, ETH issuance increases.
Data shows that the estimated total ETH issuance has been climbing consistently. Since January 2022, the annual ETH minted increased from 227k ETH to 675k ETH today. This number will continue to rise as more validators join.
However, higher ETH issuance works against the network becoming deflationary. To counterbalance this, a yield curve exists: validators receive diminishing returns on their staked ETH as their numbers grow.
The chart reflecting the annual yield (%) for 32-ETH validators shows a declining trend. The current yield is 4.8%, down from 14% in January 2022, and may fall further to the 2–3% range. At that point, it is unlikely that many new validators will join, flattening the curve and reducing new ETH issuance.
With this in mind, we can evaluate the inflation rate and determine whether the network is deflationary by incorporating the EIP-1559 burn mechanism.
Ethereum’s Inflation Rate
The following chart illustrates how much ETH is being created and issued into the market.
The current issuance rate (minted supply) is 0.56%, significantly lower than the 4% issuance rate under the previous PoW consensus mechanism. This number will continue to rise as long as the validator count increases—a trend that may persist until the Shanghai upgrade. After that, it might begin to decline as staked ETH becomes withdrawable.
We can observe that when the Merge was executed on September 15, 2022, daily ETH issuance dropped from an average of about 13k ETH per day to approximately 800 ETH per day.
EIP-1559 Burning
Now let’s add Ethereum’s token burn mechanism (EIP-1559) into the equation.
The chart above shows EIP-1559 burn cycles from April 2022 to the present. This simulation assumes the PoS model was already in effect and excludes any token issuance under the old PoW model. It helps us understand the impact of EIP-1559 and its overall effect on Ethereum’s deflationary potential.
The blue area represents the nominal issuance rate under PoS, while the red area shows the applied EIP-1559 burn rate. The purple curve indicates that had the Merge been live since April 2022, Ethereum would have been deflationary for much of the period.
However, since late July, the purple curve has entered the blue area, meaning the burn rate is lower than the PoS issuance rate, making the network inflationary again. As the data shows, Ethereum is currently in an inflationary phase.
That said, pushing the network back into deflationary territory wouldn’t require much—only about 15 gwei in gas fees. Given that Ethereum has averaged around 10 gwei over the past month, the network is poised to become highly deflationary during the next bull market. This threshold will likely lower further over time.
Conclusion
As of now, Ethereum continues to dominate decentralized finance (DeFi), accounting for 57.58% of the total value locked in its ecosystem.
Additionally, over 65% of decentralized exchange trading volume occurs on the Ethereum network.
Since the Merge, Ethereum remains the top network by fees generated.
Considering the above, Ethereum maintains its dominance among smart contract platforms, despite growing competition from chains like Cardano, Avalanche, and Solana. Users and developers still largely prefer Ethereum.
Ethereum has further upgrades planned. Co-founder Vitalik Buterin has outlined a future roadmap, with the next major upgrade being sharding. The Ethereum Foundation describes sharding as a scaling solution that will enhance inexpensive layer-2 blockchains, reduce the cost of rollups, and make it easier for users to operate nodes securing the network. After this upgrade, Ethereum could process up to 100,000 transactions per second—far surpassing VISA.
Ethereum’s adoption may increase significantly if it becomes the network of choice for central bank digital currencies (CBDCs). Currently, at least two countries are implementing pilot programs on Ethereum. The Reserve Bank of Australia is collaborating with the Digital Finance Cooperative Research Centre (DFCRC) on a pilot project. The DFCRC is developing a platform for eAUD (digital Australian dollar) as a private, permissioned implementation of Ethereum (Quorum). The eAUD ledger will operate as a centralized platform under the management and supervision of the central bank.
The Central Bank of Norway is also utilizing Ethereum for its CBDC experiments. It has open-sourced the code for its CBDC sandbox, confirming that the prototype infrastructure is based on Ethereum technology. The source code is available on GitHub, allowing testing of basic token management use cases, including minting, burning, and transferring ERC-20 tokens.
The Bank for International Settlements (BIS)—an association of 61 central banks—along with the central banks of Israel, Norway, and Sweden, have announced “Project Icebreaker,” a joint initiative to explore how CBDCs can be used for international retail and remittance payments. CBDCs are digital versions of sovereign currencies.
If these CBDC pilots succeed on Ethereum, it could become the smart chain of choice for several major central banks, solidifying its position as an undeniable force in the global financial system.
Frequently Asked Questions
What changed after Ethereum’s Merge?
Ethereum transitioned from Proof-of-Work to Proof-of-Stake, reducing energy consumption by over 99% and altering its token issuance model. Daily ETH issuance dropped significantly, making the network less inflationary.
Is Ethereum deflationary after the Merge?
Currently, Ethereum is slightly inflationary due to lower network activity and gas fees. However, it can become deflationary if average gas fees rise above 15 gwei, as more ETH would be burned than issued.
What is EIP-1559 and how does it affect supply?
EIP-1559 introduced a mechanism to burn a portion of transaction fees instead of giving them to miners. This reduces the overall ETH supply over time, especially during periods of high network usage.
Can staked ETH be withdrawn?
Not until the Shanghai upgrade, expected in 2023. After that, validators will be able to withdraw their staked ETH and rewards, potentially affecting market dynamics.
What is the current yield for staking ETH?
The current staking yield is approximately 4.8%, though it fluctuates based on the total number of validators. This yield is expected to decrease as more validators join the network.
How might Ethereum scale in the future?
Planned upgrades like sharding and layer-2 rollups aim to significantly increase transaction throughput, reduce fees, and improve overall network efficiency. 👉 Explore more strategies for understanding blockchain scaling