Graphical ETH circulation
In order to ensure the security of the chain, Eth1 adopts the proof-of-work consensus mechanism, while Eth2 adopts the proof-of-stake. Both networks reward participants by generating new ETH, which keeps the total ETH supply constantly growing.
A continuous and infinite increase in total supply would lead to inflation, and ETH might depreciate relative to other currencies. This article looks at the technical changes from the Eth1 to Eth2 network that will have short- and long-term effects on the total ETH supply.
Circulation and Inflation
For example, if the total supply at a certain point in time is 10 million, and one year later it is 12 million, it means that the net circulation is 2 million.
In the above example, the inflation rate is 20%.
Inflation rate and issuance are calculated on an annual basis. Circulation shows how much the total supply has changed, and the inflation rate shows the impact of changes in the total supply.
Note that ETH is a single currency, whether it is on the Eth1 or Eth2 chain, it can eventually be converted into each other. Therefore, when calculating the inflation rate, the issuance on both chains is added to the total supply to arrive at the actual value.
Eth1 circulation
As we all know, regarding the Eth1 circulation, each miner who digs out a block can get a block reward of 2 ETH. The generation speed of Eth1 blocks has not been set in advance, but as time goes by, the average generation time of blocks has gradually stabilized at 14 seconds. Therefore, approximately 4.5 million ETH are issued each year.
Eth1 will also issue uncle block rewards. The first block generated or broadcast to the network will become part of the main chain, and its uncle blocks will miss the main chain. Uncle block rewards depend heavily on the network and tend to be around 5% of the main issuance, or about 250,000 ETH per year.
As of this writing, the total ETH supply is approaching 110 million, with an inflation rate of approximately 4.5% over the past year.
Impact of Eth2 Phase 0
Eth2 has its own issuance mechanism. The generation of blocks is more regular, that is, at most one block is generated every 12-second time slot. Nonetheless, the total number of validators actively securing the network during the generation of each block determines the reward for that block.
The graph below presents the relationship between circulation and the number of validators:
Chart 1: Eth2 circulation
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Impact of EIP-1559
Currently, all fees paid by users when sending transactions on the Ethereum chain are rewarded to the miner of that block. EIP-1559 is an Ethereum Improvement Proposal to improve the transaction fee distribution scheme (among other changes, of course). A significant portion of transaction fees are “burned,” disappearing from the chain entirely, reducing issuance.
Various transaction fee burn schemes have been considered, and the current proposal is to burn approximately 80% of transaction fees.
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The impact of stopping mining
Discussions about merging Eth1 and Eth2 are ongoing. For the purpose of this article, regardless of the merger in any form, the point is that the Eth1 chain will adopt the Eth2 proof-of-stake consensus mechanism to ensure security, and the existing proof-of-work consensus mechanism is no longer required.
Block rewards and uncle block rewards will no longer be issued after the merger, which will greatly reduce the circulation.
Impact of Eth2 Phase 2
Phase 2 of Eth2 introduces transactions. Although the details of these transactions have not yet been confirmed, this phase will introduce other actors to act as state providers. Networks need to be paid for their work, which means circulation will grow. There is no specific data yet, but it is reasonable to expect that state providers will receive 30% of the rewards of fully validating nodes,
Validators in phase 2 need to do more work independently, which can offset the increase in the above situation. Also, for the first time since the launch of Phase 2, it will be possible to stop validating with ease, which will likely lead to fewer validators and consequently fewer issuances.
In summary
In summary
The timeline in the figure below synthesizes all the changes and roughly predicts the change trend of Eth issuance in the next few years.
Chart 2: Change trend of circulation
Obviously, the actual dates are not marked on the timeline, but numbered markers are used. These numbers correspond to the following phases:
Eth2 Phase 0
EIP-1559
stop mining
Eth2 Phase 2
I do not guarantee that these matters will be done in strict order. For example, it is possible to implement EIP-1559 after mining has ceased.
Although the above graph is not very clear, it can be seen from the graph that after Eth2 launch, the predicted issuance changes from an approximate value to a range value, which is due to the issuance starting to depend on the number of validators. The range values shown are the most likely estimates based on information available to date.
Eth2’s move to proof-of-stake had an immediate and massive impact on issuance, but only a one-off.
In contrast, the initial impact of EIP-1559 on circulation is relatively small, but the magnitude of its impact is directly proportional to the number of transactions processed on the Ethereum network. As transaction volume increases, circulation will continue to decline, possibly dropping below zero. At this point, ETH will experience deflation for the first time.
Original link:
Original link:https://www.attestant.io/
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