A common misperception about crypto assets is that all coins without a hard supply limit are inflationary currencies, meaning they are assets that decline in market value over time. 

Bitcoin, with its 21 million BTC supply cap, is often touted as the ultimate “hedge against inflation.” This is because increasing demand for the crypto asset will never cause its total supply to expand beyond 21 million coins. No matter the BTC market price over time, issuance of new bitcoins is programmed to decrease every four years through events called “halvings.”

This is a comforting characteristic of bitcoin for individuals and businesses who distrust the management of fiat currencies at the hand of state actors. Countries with a history of rampant inflation are case studies in how the purchasing power of an asset can wither away through sudden and exorbitant increases to money supply. 

While setting a finite supply is one way to protect against inflationary market forces, it’s not the only way. There are other crypto assets such as ether, the native cryptocurrency of the Ethereum, with monetary policies aimed at curbing inflation over time without relying on a hard supply cap. 

How a fixed issuance schedule affects ether supply

Like bitcoin, ether has a fixed issuance schedule. For every block produced on the network, Ethereum issues two new coins into circulation. No matter the number of active users, number of transactions or the market price of ether, the total supply is programmed to increase gradually.

So long as demand for ether outpaces its steady supply growth, it will not be an inflationary currency whose value depreciates over time. 

A caveat to this statement is that, unlike Bitcoin, Ethereum’s monetary policy is in flux. Ethereum does have an issuance schedule of 2 ETH/block today. However, this wasn’t always the case. 

Two years ago, the fixed issuance schedule of ether was 3 ETH/block. Two years before that the schedule was 5 ETH/block. 

While the block reward issuance schedule is subject to change, an important takeaway from these updates is that Ethereum developers have never increased the ether supply issuance. They’ve consistently aimed to reduce it and, in fact, plan to do so even further through Ethereum Improvement Proposal (EIP) 1559 and Ethereum 2.0.

Ether's supply, EIP 1559 and Ethereum 2.0

While ether does not have a fixed supply cap, it may potentially have a fee-burning mechanism that takes a portion of coin supply out of circulation. 

EIP 1559 was originally proposed to make transaction fees on Ethereum more predictable for users. The proposal introduces a base fee for all transactions that is automatically calculated based on network activity and once paid, immediately burned. 

Depending on the activity of the network, EIP 1559 could burn more ether through base fees than the amount of new ether issued into circulation through miner block rewards. While this is not a guaranteed outcome, it is a highly likely one, judging by the rise of transaction activity on Ethereum. 

What’s more, Ethereum is transitioning to a more cost-effective and energy-efficient model for blockchain security known as proof-of-stake (PoS). This transition to PoS, dubbed Ethereum 2.0, is expected to reduce the issuance rate of ether from roughly 5% to less than 1% per annum. 

With a near-zero percent increase in the total supply of ether under PoS, there is even greater potential for asset demand to outstrip its growth in supply. In this case, the value of ether would increase over time. 

These disinflationary forces on the supply schedule of ether – a fixed issuance schedule, EIP 1559 and Ethereum 2.0 – both current and projected, suggest that, like bitcoin, there could be a case made for its potential as a store-of-value asset. 

Pulse check: Eth 2.0 milestones

If you’re new to Valid Points and the topic of Ethereum 2.0 in general, be sure to check out our 101 explainer on Eth 2.0 metrics to get up to speed about terminology used throughout this newsletter. 

Multiple milestones were reached this past week on Ethereum 2.0. 

For the first time since launch, the queue of pending validators reached zero. As of Tuesday, March 9, this metric still trends below 900 which means that any new validators that join the network will be activated within 24 hours. 

In addition, the amount of ETH staked on Eth 2.0 has crossed the 3% threshold of total circulating coin supply. This means that 3% of all ether in existence will not be available for use on decentralized applications, for trading or any other purpose other than staking on Eth 2.0 until a future point in time.