Scaling remains the most important technical question, as the ability to create a mental model of what the value of the Ethereum token, and almost all blockchain tokens flows from if, when, and how Ethereum scales. Leading up to the merge, there was heavy debate in the Ethereum community about the fee structure of how the network gets paid for usage. Ethereums monetary policy has radically changed over the years, and has been the subject of contentious debate every time it has changed. The big question is, should ethereum shoot for low inflation like the FED, deflation, or higher rates of inflation. Ethereum’s monetary policy largely determines what Ethereum “is'', and as a result the debates have been vicious. As an open source project, Ethereum has a process called EIP’s, or Ethereum Improvement Proposals. EIP 1559 was one of the most hotly debated and important in the projects life. It proposed to change the fee structure with the goal of having fees to use the network be steadier rather than having the frequent spikes Ethereum had been experiencing. It also proposed burning some proportion of the ETH paid in a transaction rather than that ETH all going to the miner. As a result, depending on the amount of usage the network was getting, ETH’s monetary policy could, for the first time, be deflationary. Simple macroeconomics can tell you that as the supply of a thing goes down, typically it’s price goes up, so many in the community were heavily in favor of a proposal that might make the value of the asset they held be worth more. We held multiple research calls in an attempt to understand how the change in ETH’s monetary policy might affect it’s long term value.
Currently, the issuance of new Ethereum is about 14,600 ETH/day, which is the aggregate of 13,000 ETH from mining rewards on Mainnet and 1,600 ETH from staking rewards on the Beacon Chain. After “The Merge”, there will be no Proof-of-Work and thus no mining rewards, leaving just 1,600 ETH/day in staking rewards.
A year ago, the London upgrade went live, which introduced a minimum fee (known as a base fee) for every transaction to be considered valid. That fee is then burned, resulting in approximately 1,600 ETH removed from the total supply each day based on an average gas price of 16 gwei, according to the Ethereum website. (A gwei is one-billionth of one ETH.)
After “The Merge”, Ethereum’s issuance rate of 1,600 ETH/day in staking rewards minus the fees burned nets out to zero. Subtracting penalties incurred by validators (e.g. getting slashed for misbehaving) and ETH that is lost over time, this would make Ethereum issuance net negative. In the context of today’s inflationary environment, Ethereum’s shift towards a potentially deflationary asset is an exciting prospect.