EIP-1559 Protocol Creates De Facto Supply Cap for Ethereum’s Ether

Ethereum, the second-largest cryptocurrency by market capitalization, has no formal cap on the supply of ether. However, the introduction of the EIP-1559 protocol, which burns a portion of Ethereum transaction fees, has created an informal supply cap.

According to data from Ultrasound Money, the total ether supply peaked in March 2023 at 120.5 million ETH and has declined by about 100,000 ETH since then.

The introduction of EIP-1559 was intended to make transaction fees more predictable and straightforward. However, the protocol’s de facto supply cap has become a side benefit for many ether holders. As burned fees are effectively a refund to ETH holders, the value of ETH is directly tied to the intensity of network usage.

The impact of EIP-1559 is evident in the 5-month straight deflation of ether’s supply, fueled by network usage such as rollups and meme tokens. Additionally, the amount of ether staked has been trending steadily higher, reaching an all-time high of 566,000 validators.

Compared to other cryptocurrencies, such as Bitcoin and gold, ether’s supply has fallen 1.07% since the burn began, while Bitcoin’s inflation rate stands at 1.74%. Roughly 3,100 metric tons of gold will be mined in 2023, resulting in between 2-3% supply inflation.

The EIP-1559 protocol’s impact on the supply of ether has created an interesting dynamic for ether holders and investors. While there is no formal cap on the supply of ether, the protocol’s de facto supply cap has resulted in a decline in supply and may have positive implications for the value of ether in the long term.

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