We’re quickly approaching The Merge, the most notable upgrade in Ethereum’s history and a crucial turning point for the wider crypto industry. As the Ethereum blockchain transitions from proof-of-work (PoW) to proof-of-stake (PoS), The Merge is expected to be the bedrock upon which Ethereum’s scalability improvements are built.
As this highly anticipated event draws closer, the ETH community has begun hypothesizing that the rate of ETH burn will entirely offset and surpass the rate of newly issued ETH (the number of newly minted ETH issued per unit of time), resulting in negative net issuance. The theory is that more ETH will be destroyed than created over time.
But will ETH actually become deflationary post-Merge? In Kraken Intelligence’s latest report, the team takes an analytical deep dive into how The Merge may affect ETH’s net issuance rate.
What does The Merge mean for ETH’s issuance?
The transition from PoW to PoS will impact ETH’s issuance rate.
At the moment, Ethereum PoW and Ethereum PoS operate in parallel, meaning there are two sources of ETH: miner rewards on the Ethereum PoW chain and validator rewards on the Ethereum PoS chain. Post-Merge, only Ethereum PoS will operate, eliminating miner rewards. Validator rewards will remain as Ethereum’s only source of issuance.
A nuanced approach
Our report sheds light on the importance of taking a more nuanced approach around the question of whether ETH will become deflationary post-Merge.
We estimate the threshold base fee above which ETH becomes deflationary post-Merge – first focusing on estimating the threshold base fee at the time of writing – and then running sensitivity analyses to explore different scenarios. We find that a threshold base fee greater than 15.43 gwei is required for ETH to become deflationary post-Merge given the current number of validators at the time of writing this blog. For context, the 15.43 gwei threshold base fee is 19% higher than the average base fee was in August 2022 (13 gwei) and within the range of gas fees observed over the last 12 months (10-200 gwei).
What’s next?
Given the current gas fee environment, we predict a slightly inflationary ETH net issuance post-Merge. However, we expect to observe deflationary periods as network usage spikes.
Want to know more about the circumstances that might make ETH deflationary? Read the Kraken Intelligence report, Ethereum 2.0: Does ETH become deflationary post-Merge? The team explores the upcoming Merge and investigates what this means for ETH and ETH holders.
These materials are for general information purposes only and are not investment advice or a recommendation or solicitation to buy, sell or hold any digital asset or to engage in any specific trading strategy. Some crypto products and markets are unregulated, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the cryptoasset markets can lead to loss of funds. Tax may be payable on any return and/or on any increase in the value of your cryptoassets and you should seek independent advice on your taxation position.
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Source: https://blog.kraken.com/post/15411/ethereum-2-0-does-eth-become-deflationary-post-merge/
