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Sahifa oxirgi marta yangilandi: 29-noyabr, 2022

How The Merge impacted ETH supply

The Merge represented the Ethereum networks transition from proof-of-work to proof-of-stake which occurred in September 2022. The way ETH is issued underwent changes at time of that transition. Previously, new ETH was issued from two sources: the execution layer (i.e. Mainnet) and the consensus layer (i.e. Beacon Chain). Since The Merge, issuance on the execution layer is now zero. Let's break this down.

Components of ETH issuance

We can break the supply of ETH into two primary forces: issuance, and burn.

The issuance of ETH is the process of creating ETH that did not previously exist. The burning of ETH is when existing ETH gets destroyed, removing it from circulation. The rate of issuance and burning gets calculated on several parameters, and the balance between them determines the resulting inflation/deflation rate of ether.


ETH issuance tldr

  • Before transitioning to proof-of-stake, miners were issued approximately 13,000 ETH/day
  • Stakers are issued approximately 1,700 ETH/day, based on about 14 million total ETH staked
  • The exact staking issuance fluctuates based on the total amount of ETH staked
  • Since The Merge, only the ~1,700 ETH/day remains, dropping total new ETH issuance by ~88%
  • The burn: This fluctuate according to network demand. If an average gas price of at least 16 gwei is observed for a given day, this effectively offsets the ~1,700 ETH that is issued to validators and brings net ETH inflation to zero or less for that day.

Pre-merge (historical)

Execution layer issuance

Under proof-of-work, miners only interacted with the execution layer and were rewarded with block rewards if they were the first miner to solve the next block. Since the Constantinople upgrade in 2019 this reward had been 2 ETH per block. Miners were also rewarded for publishing ommer blocks, which were valid blocks that didn't end up in the longest/canonical chain. These rewards maxed out at 1.75 ETH per ommer, and were in addition to the reward issued from the canonical block. The process of mining was an economically intensive activity, which historically required high levels of ETH issuance to sustain.

Consensus layer issuance

The Beacon Chain went live in 2020. Instead of miners, it is secured by validators using proof-of-stake. This chain was bootstrapped by Ethereum users depositing ETH one-way into a smart contract on Mainnet (the execution layer), which the Beacon Chain listens to, crediting the user with an equal amount of ETH on the new chain. Until The Merge happened, the Beacon Chain's validators were not processing transactions and were essentially coming to consensus on the state of the validator pool itself.

Validators on the Beacon Chain are rewarded with ETH for attesting to the state of the chain and proposing blocks. Rewards (or penalties) are calculated and distributed at each epoch (every 6.4 minutes) based on validator performance. Validator rewards are significantly less than the mining rewards that were previously issued under proof-of-work (2 ETH every ~13.5 seconds), as operating a validating node is not an economically intense activity and thus does not require or warrant as high a reward.

Pre-merge issuance breakdown

Total ETH supply: ~120,520,000 ETH (at time of The Merge in September 2022)

Execution layer issuance:

  • Was estimated at 2.08 ETH per 13.3 seconds*: ~4,930,000 ETH issued in a year
  • Resulted in an inflation rate of approximately 4.09% (4.93M per year / 120.5M total)
  • *This includes the 2 ETH per canonical block, plus an average of 0.08 ETH over time from ommer blocks. Also uses 13.3 seconds, the baseline block time target without any influence from a difficulty bomb. (See source)

Consensus layer issuance:

  • Using 14,000,000 total ETH staked, the rate of ETH issuance is approximately 1700 ETH/day (See source)
  • Results in ~620,500 ETH issued in a year
  • Resulted in inflation rate of approximately 0.52% (620.5K per year / 119.3M total)
Total annualized issuance rate (pre-merge): ~4.61% (4.09% + 0.52%)

~88.7% of the issuance was going to miners on the execution layer (4.09 / 4.61 * 100)

~11.3% was being issued to stakers on the consensus layer (0.52 / 4.61 * 100)

Post-merge (present day)

Execution layer issuance

Execution layer issuance since The Merge is zero. Proof-of-work is no longer a valid means of block production under the upgraded rules of consensus. All execution layer activity is packaged into "beacon blocks", which are published and attested to by proof-of-stake validators. Rewards for attesting-to and publishing beacon blocks are accounted for separately on the consensus layer.

Consensus layer issuance

Consensus layer issuance continues today as it did prior to The Merge, with small rewards for validators who attest to and propose blocks. Validator rewards continue to accrue to validator balances that are managed within the consensus layer. These are separate Ethereum accounts to the accounts we're used to on Mainnet, and until the upcoming Shanghai upgrade funds from validator accounts will not be withdrawable/transferrable. This means that although new ETH is still being issued, 100% remains locked from the market until this upgrade occurs. When the Shanghai upgrade is rolled out, this ETH will become available.

When validator withdrawals are enabled, stakers will be incentivized to remove their earnings/rewards (balance over 32 ETH) as these funds are otherwise not contributing to their stake weight (which maxes at 32).

After withdraw functionality is enabled, stakers may also choose to exit and withdraw their entire validator balance. To ensure Ethereum is stable, the number of validators leaving simultaneously is capped. Only six validators may exit in a given epoch (6.4 minute period) depending on the total ETH staked at the time. This decreases to as low as four as more validators withdraw to intentionally prevent large destabilizing amounts of staked ETH from leaving at once.

Post-merge inflation breakdown

  • Total ETH supply: ~120,520,000 ETH (at time of The Merge in September 2022)
  • Execution layer issuance: 0
  • Consensus layer issuance: Same as above, ~0.52% annualized issuance rate (with 14 million total ETH staked)
Total annualized issuance rate: ~0.52%

Net reduction in annual ETH issuance: ~88.7% ((4.61% - 0.52%) / 4.61% * 100)

🔥 The burn

The opposite force to ETH issuance is the rate at which ETH is burned. For a transaction to execute on Ethereum, a minimum fee (known as a "base fee") must be paid, which fluctuates continuously (block-to-block) depending on network activity. The fee is paid in ETH and is required for the transaction to be considered valid. This fee gets burned during the transaction process, removing it from circulation.

Fee burning went live with the London upgrade in August 2021, and remains unchanged since The Merge.

On top of the fee burn implemented by the London upgrade, validators can also incur penalties for being offline, or worse, they can be slashed for breaking specific rules that threaten network security. These penalties result in a reduction of ETH from that validator's balance, which is not directly rewarded to any other account, effectively burning/removing it from circulation.

Calculating average gas price for deflation

As discussed above, the amount of ETH issued in a given day is dependent upon the total ETH staked. At time of writing, this is approximately 1700 ETH/day.

To determine the average gas price required to completely offset this issuance in a given 24-hour period, we'll start by calculating the total number of blocks in a day, given a block time of 12 seconds:

  • (1 block / 12 seconds) * (60 seconds/minute) = 5 blocks/minute
  • (5 blocks/minute) * (60 minutes/hour) = 300 blocks/hour
  • (300 blocks/hour) * (24 hours/day) = 7200 blocks/day

Each block targets 15x10^6 gas/block (more on gas). Using this, we can solve for the average gas price (in units of gwei/gas) required to offset issuance, given a total daily ETH issuance of 1700 ETH:

  • 7200 blocks/day * 15x10^6 gas/block * Y gwei/gas * 1 ETH/ 10^9 gwei = 1700 ETH/day

Solving for Y:

  • Y = (1700(10^9))/(7200 * 15(10^6)) = (17x10^3)/(72 * 15) = 16 gwei (rounding to only two significant digits)

Another way to rearrange this last step would be to replace 1700 with a variable X that represents the daily ETH issuance, and to simplify the rest to:

  • Y = (X(10^3)/(7200 * 15)) = X/108

We can simplify and write this as a function of X:

  • f(X) = X/108 where X is daily ETH issuance, and f(X) represents the gwei/gas price required to offset all of the newly issued ETH.

So, for example, if X (daily ETH issuance) rises to 1800 based on total ETH staked, f(X) (gwei required to offset all of the issuance) would then be 17 gwei (using 2 significant digits)

Further reading

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