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If you’re evaluating Ethereum for long-term allocation, one of the most important dynamics to understand is its supply. Unlike Bitcoin, which is capped at 21 million coins, Ethereum’s supply is adaptive, it changes based on how much the network is used and how much ETH is issued to validators.
Since the London Hard Fork (EIP-1559) and Ethereum’s transition to Proof-of-Stake (PoS), these supply dynamics have shifted dramatically. For you as an investor, that means ETH has become not only scarce, but in certain periods, even deflationary.
In this article, we’ll walk through:
- How EIP-1559 permanently burns ETH
- How issuance under Proof-of-Stake differs from Proof-of-Work
- What these changes mean for scarcity, value appreciation, and long-term allocation decisions
How EIP-1559 Burns ETH
Before EIP-1559, introduced in August 2021, users paid gas fees entirely to miners. That meant every transaction increased miner revenue but did nothing to affect supply.
EIP-1559 changed the equation:
- Base Fee Burn
Each transaction now includes a base fee set by the protocol. Instead of going to validators, this fee is burned, permanently removed from circulation.“The base fee is always burned (i.e., it is destroyed by the protocol).” (Ethereum.org EIP-1559: Fee Market Change for ETH 1.0 Chain)
- Priority Tips
Users can still add a small “tip” to validators to speed up transactions. But the bulk of fees, the base fee, no longer enters circulation.
What This Means for You
Every time someone swaps tokens on DeFi, mints an NFT, or transfers stablecoins, ETH supply shrinks. During periods of high demand, burn rates can outpace new issuance, pushing Ethereum into net deflation.
For example, in May 2021 during the NFT boom, daily burns exceeded 20,000 ETH on multiple occasions. In the first year after EIP-1559, over 2.6 million ETH was burned.
Here’s why this matters: the more people use Ethereum, the scarcer ETH becomes. If you’re analyzing ETH’s value drivers, tracking burn rates gives you a direct measure of how adoption translates into supply reduction.
Proof-of-Stake Issuance: A 90% Supply Cut
The other big shift came in September 2022 with The Merge, when Ethereum transitioned from Proof-of-Work (PoW) to Proof-of-Stake (PoS).
Under Proof-of-Work (Before The Merge)
- Issuance: ~13,000 ETH per day to miners
- Costs: Miners spent heavily on electricity and hardware
- Result: Most ETH issued was quickly sold to cover expenses, creating constant sell pressure
Under Proof-of-Stake (After The Merge)
- Issuance: ~1,700 ETH per day to validators (a reduction of ~88%)
- Costs: Validators mainly need to run software; overhead is far lower
- Result: Less ETH issued and less forced selling
For you, this means dilution risk dropped by almost 90% overnight. Some analysts call it the equivalent of “three Bitcoin halvings at once.”
Net Supply: How Ethereum Becomes Deflationary
When you combine the EIP-1559 burn with reduced PoS issuance, you get something unique: Ethereum’s supply can actually shrink.
- Inflationary Periods: When activity is low, issuance may slightly exceed burns.
- Deflationary Periods: When activity spikes, think NFT booms, DeFi surges, or stablecoin adoption, burns outweigh issuance, and net supply declines.
Since The Merge, Ethereum has often been deflationary. For example, in the year following The Merge, Ethereum’s net supply decreased by roughly 300,000 ETH despite continued network growth.
For investors, this means ETH is not just “limited supply” like Bitcoin: it’s potentially decreasing supply.
The Numbers Tell the Story
- Pre-Merge circulating supply: ~120.5 million ETH
- One year after The Merge: ~300,000 ETH fewer in circulation
- Peak burn rates: during network surges, daily burns exceeded issuance by multiple times
For you, the implication is simple: ETH is harder to come by when network usage grows.
Why This Matters for Long-Term Investors
Scarcity is at the heart of every investment case for monetary assets. Gold is scarce because mining is difficult. Bitcoin is scarce because of its 21 million cap. Ethereum adds another dimension: adaptive scarcity.
Here’s what that means for you:
- Stronger Store-of-Value Characteristics
With issuance slashed and frequent net burns, ETH increasingly functions as a hedge against monetary inflation. - Demand-Linked Scarcity
Unlike gold or Bitcoin, Ethereum’s scarcity is directly tied to usage. As adoption grows, through DeFi, stablecoins, or NFTs, more ETH gets burned. - Lower Sell Pressure from Validators
Proof-of-Stake reduces the need for constant selling. Validators don’t have the same electricity bills miners did, so systemic sell pressure is much lower. - Dual Role: Utility + Monetary Asset
ETH isn’t just scarce, it’s also the “fuel” for the network and a yield-bearing asset when staked.
Ethereum vs. Bitcoin: Two Scarcity Models
When comparing Ethereum with Bitcoin, it’s useful to think about how their scarcity models differ.
- Bitcoin: Fixed cap of 21 million. Scarcity is predetermined, unaffected by demand.
- Ethereum: No fixed cap, but supply is dynamically reduced via burns. Net supply depends on adoption and often trends deflationary.
For your portfolio, this means Bitcoin acts as a predictable, static scarce asset, while Ethereum offers scarcity that scales with real-world usage.
Why Institutions Are Paying Attention
Large institutions and asset managers are increasingly recognizing Ethereum as more than just a technology platform. Its evolving supply dynamics are making it an attractive investment case in their own right.
Here’s why professional allocators are watching:
- Transparent Monetary Policy: Both issuance and burns are verifiable on-chain. Nothing is hidden. Dashboards like ultrasound.money track live issuance and burns.
- Real-Time Data: Supply, staking rewards, and burn rates can be tracked live, making it easier to model ETH compared to many traditional assets.
- Portfolio Role: ETH combines elements of a growth equity (exposure to digital application adoption) with a monetary asset (scarcity + yield).
For you, this creates optionality: ETH can serve as both a long-term growth allocation and a hedge against inflationary pressures in traditional markets.
Key Takeaways for You as an Investor
- Every Ethereum transaction now reduces ETH supply through burns.
- Proof-of-Stake has cut issuance by ~90%, lowering dilution and sell pressure.
- Ethereum frequently operates as a deflationary asset when network usage is high.
- ETH is both the fuel for Ethereum and a scarce, yield-bearing store of value.
- For portfolios, ETH offers a hybrid profile: growth exposure plus monetary scarcity.
Ethereum’s Case for Long-Term Allocation
Ethereum’s shift to a deflationary supply model isn’t just a technical upgrade—it’s a structural transformation that matters for your portfolio decisions.
Here’s the bottom line:
- ETH doesn’t just have limited issuance, it has the potential to shrink in supply.
- Network adoption makes ETH scarcer, not more abundant.
- Staking adds an income component, giving ETH both scarcity and yield.
Platforms such as YCharts provide data on Ethereum’s circulating supply, offering visibility into its monetary dynamics. If you’re building long-term exposure to the sector, understanding Ethereum’s deflationary supply is fundamental.
Move Beyond Basic Staking
Bit Digital was among the first public companies to hold, manage, and stake Ethereum as part of a long-term treasury strategy. Our institutional framework helps investors capture Ethereum’s economic upside without the complexity of custody or wallets.
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