The Merge marked a pivotal moment in Ethereum’s evolution—its transition from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism in September 2022. Beyond being a technological milestone, this shift fundamentally altered the economics of ETH supply. By eliminating mining rewards and reshaping how new ether is issued, The Merge dramatically reduced inflationary pressure on the network. This article explores the transformation in ETH issuance, the role of burning, and how these forces now interact to influence Ethereum’s long-term monetary policy.
Understanding ETH Supply Dynamics
At the core of Ethereum’s post-Merge economy are two opposing forces: issuance and burning.
- Issuance refers to the creation of new ETH, distributed as rewards to validators who secure the network.
- Burning occurs when ETH is permanently removed from circulation—primarily through transaction fees paid during network activity.
The balance between these two determines whether Ethereum experiences net inflation or deflation. Since The Merge, daily issuance has dropped by approximately 88%, making it increasingly possible for burning to exceed issuance—potentially leading to a deflationary supply.
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Pre-Merge: The Era of Proof-of-Work
Before The Merge, Ethereum operated under a dual-layer reward system involving both the execution layer (Mainnet) and the consensus layer (Beacon Chain). This structure led to significantly higher issuance rates.
Execution Layer Issuance
Under PoW, miners secured the network by solving cryptographic puzzles. They were rewarded with:
- 2 ETH per canonical block
- Up to 1.75 ETH per ommer block (valid blocks not included in the main chain)
With an average block time of 13.3 seconds, this translated into roughly 4,930,000 ETH issued annually—an inflation rate of about 4.09% based on the ~120.5 million ETH supply at the time of The Merge.
Mining was resource-intensive, requiring substantial hardware and energy investment, which justified high block rewards.
Consensus Layer Issuance
Launched in December 2020, the Beacon Chain introduced proof-of-stake to Ethereum. Validators—users who staked ETH—earned rewards for proposing blocks and attesting to chain validity.
With approximately 14 million ETH staked, annual issuance on the Beacon Chain was around 620,500 ETH, contributing an additional 0.52% inflation.
Total Pre-Merge Inflation
Combined, these two layers resulted in a total annual issuance rate of ~4.61%, with:
- 88.7% going to miners
- 11.3% going to stakers
This heavy reliance on miner rewards made Ethereum inherently inflationary before The Merge.
Post-Merge: A New Economic Paradigm
After The Merge, Ethereum no longer relies on miners. All block production is now handled by validators using PoS. This change eliminated execution layer issuance entirely.
Execution Layer Post-Merge
There is now zero ETH issuance from the execution layer. Instead, all rewards are managed within the consensus layer and distributed to validators who participate in block proposal and attestation.
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Consensus Layer Today
Validator rewards continue at a much lower rate than pre-Merge mining rewards—approximately 1,700 ETH per day, or ~0.52% annual inflation with current staking levels.
One key development since The Merge is the Shanghai/Capella upgrade in April 2023, which enabled withdrawals of staked ETH and accrued rewards. Now, validators can:
- Withdraw excess earnings above 32 ETH
- Fully exit and retrieve their entire stake
To maintain network stability, exit rates are capped:
- 4 validators per epoch (about 900 per day) can exit by default
- An additional validator can exit for every 65,536 validators beyond 262,144
- For example, with over 393,216 active validators, up to 6 per epoch (about 1,350 per day) may exit
These limits prevent mass withdrawals that could destabilize the network.
Net Impact on ETH Inflation
Post-Merge, total annual issuance dropped from ~4.61% to ~0.52%, representing an 88.7% reduction in new ETH creation.
With issuance so low, the possibility of deflation becomes realistic—if burn exceeds issuance.
The Role of ETH Burning
Since the London upgrade in August 2021, Ethereum has implemented a fee-burning mechanism. Every transaction requires a base fee, paid in ETH and destroyed upon execution.
This burn counteracts issuance. When network demand is high and gas prices rise, more ETH is burned—potentially exceeding daily issuance and leading to a net decrease in supply.
Calculating Deflation Thresholds
To determine when Ethereum turns deflationary, we calculate the average gas price needed to offset ~1,700 ETH issued daily:
- 7,200 blocks/day (at 12-second intervals)
- Each block targets 15 million gas
- Total daily gas capacity: 108 billion gas
Using the formula:
Required gas price (gwei) = Daily issuance (ETH) / 108
At 1,700 ETH/day issuance:
- 1,700 / 108 ≈ 16 gwei
Thus, if the average gas price exceeds 16 gwei, more ETH is burned than issued—resulting in net deflation.
If staking grows and daily issuance rises to 1,800 ETH, the threshold increases slightly to ~17 gwei.
Validators also face penalties for downtime or malicious behavior (slashing), which further reduces circulating supply—adding another deflationary pressure.
Frequently Asked Questions
What was the main economic impact of The Merge?
The Merge drastically reduced ETH issuance by eliminating miner rewards. Daily new supply dropped from ~13,000 ETH to ~1,700 ETH—a nearly 90% decrease—making Ethereum far less inflationary.
Can Ethereum become deflationary?
Yes. When network activity drives gas prices above ~16 gwei on average, the amount of ETH burned exceeds daily issuance, resulting in a net reduction of total supply.
How does staking affect ETH supply?
Staking increases validator rewards slightly as more ETH is locked up—but growth is self-limiting due to diminishing returns. Higher staking also raises the gas price threshold needed for deflation.
What happens when validators withdraw their ETH?
Withdrawals don’t increase total supply—they simply move staked ETH back into liquid circulation. However, large-scale exits could temporarily reduce security if not managed properly through exit queues.
Does burning replace miner rewards?
Not directly. Burning removes ETH from circulation, while staking rewards add new ETH. Together, they create a dynamic equilibrium where high usage can lead to deflation despite ongoing issuance.
Is Ethereum’s supply fixed?
No. Unlike Bitcoin, Ethereum does not have a hard cap. However, its supply can be net-neutral or even deflationary under sustained network demand.
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By aligning security incentives with economic efficiency, The Merge transformed Ethereum into a more sustainable and potentially deflationary asset. As adoption grows and usage increases, the interplay between issuance and burn will continue shaping ether’s long-term value proposition.