In 2018, Vitalik Buterin joked about Ethereum’s possible supply cap. Five years later, this funny quote seems to have become prophecy.
In the unpredictable crypto world, a silly joke can sometimes shape the course of events. Elon Musk with statements related to Dogecoin is an example.
This is also the case with the co-founder of Ethereum, in an April Fool’s Day 2018 joke, Vitalik Buterin proposed a supply cap of Ether. At the time, the idea was dismissed as unlikely.
Now, a combination of technology and circumstances has turned the old joke into an unforeseen reality, with the total supply of Ether seemingly capped. This unexpected turn of events has major implications for the Ethereum network, its users, and the entire crypto market.
Unintended Ether Supply Limit
Currently, thanks to a combination of technological progress, the supply curve of Ethereum is undergoing a drastic change. Key factors in this unexpected turn were the EIP-1559 burn mechanism and the impact of the Merge on Ethereum’s supply curve.
Ethereum Improvement Proposal (EIP) 1559, the core component of the London hard fork, has introduced a mechanism to burn part of transaction fees. This unique feature has a strong impact on the Ether supply. With regular Ether burning, EIP-1559 effectively reduces the total supply of the coin.
At the same time, Ethereum’s transition from Proof-of-Work (PoW) to the Proof-of-Stake (PoS) consensus mechanism, known as the Merge, dramatically changed the speed. create new Ether. In the PoW model, miners train new Ether when adding transactions to the blockchain. However, the PoS model significantly reduces this new Ether generation rate.
These technological advancements inadvertently caused Ethereum to go down a deflationary path. Compared to Vitalik’s original vision of “minimum necessary issuance”, i.e. avoiding excessive inflation or deflation in the Ether supply – this is a stark difference. However, this change could have profound implications for the future of Ethereum.
Gold, Bitcoin and Ether
Ether’s deflation has spillover effects beyond the Ethereum network. As the total supply of Ether decreases, the scarcity of the token increases. Scarcity, as economic theory suggests, can increase the value of an asset.
In the crypto sphere, Ethereum’s unplanned supply cap evokes comparisons with Bitcoin, the largest cryptocurrency by market capitalization. Bitcoin’s fixed supply limit is 21 million. When these coins are fully mined, there will be no new Bitcoins. Ethereum’s unplanned supply cap puts it in a similar position, potentially boosting its appeal as a store of value.
In addition, this discussion would not be complete without considering gold, the traditional shield against inflation. The supply of gold, like Bitcoin, is naturally limited. At some point, we will run out of gold to mine. This scarcity has been a key factor in its value proposition for centuries. Ethereum’s new deflation also evokes comparisons with this timeless asset class.
Amount of Ether in circulation from November 2016 – November 10, 2022. Photo: Statista.
The long-term meaning of supply cap
The sudden appearance of a supply cap in the Ethereum ecosystem sparked speculations about the future of the network. One potential challenge lies in transaction fees. As Ether becomes more scarce, transaction fees can increase. High transaction costs can deter users and potentially limit the growth of Ethereum.
However, the limited supply could attract a new wave of investors, enhancing Ethereum’s market position. Because scarcity often increases the attractiveness of assets. With an unintentional supply cap, Ether becomes a more attractive investment. This can drive demand and potentially increase the value of the token.
However, this raises another question: Will Ethereum’s limited supply change its fundamental nature? So far, Ethereum has been appreciated in terms of utility, especially the ability to deploy smart contracts on the network. With a supply cap, it could grow into a store of value, much like Bitcoin or gold.