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Ethereum’s inflation rate explained in simple terms

What’s the Ethereum inflation rate and what does this mean for the value of Ether (ETH)?

Ether (ETH) is the native token of Ethereum, a blockchain-based platform designed to help developers build and distribute decentralized applications. The world’s second largest cryptocurrency by market cap after bitcoin (BTC) at the time of this writing, ETH can be used to pay transaction fees and for computational services when using the Ethereum network. ETH can also be bought and sold on cryptocurrency exchanges; however, before buying any ETH, you should make sure you’re aware of all the factors that could potentially affect its value. One of those factors is its rate of inflation, also known as the ETH issuance rate.

What is the ETH inflation rate?

Unlike BTC, which has a maximum supply capped at 21,000,000 BTC, ETH does not have an overall cap. The total supply of ETH and its rate of issuance was instead determined in the cryptocurrency’s 2014 pre-sale. That sale had 60,000,000 ETH created for contributors to the pre-sale, 12,000,000 ETH created as a development fund, and the annual issuance capped at 18,000,000 ETH per year.

This annual issuance of new ETH represents roughly one-quarter of the initial supply. Whenever a block is mined, which occurs approximately every 15 seconds, that miner receives an award in ETH. This was originally set at 5 ETH but was reduced to 3 ETH following the Ethereum network’s Byzantium update in October 2017. The Byzantium update is one half of the larger Metropolis update to the Ethereum network which concludes with Constantinople sometime in 2018. At the time of this writing, it’s unknown whether the Constantinople upgrade will affect the inflation rate.

Miners can also access what’s known as an uncle/aunt reward, in which a specified amount of ETH is sent to a miner who’s also able to find a solution but whose block isn’t included. This reward was originally 2–3 ETH but was reduced to 0.625–2.625 following the Byzantium update.

Decreasing inflation

While the total annual issuance of ETH is fixed at 18,000,000, this means relative inflation decreases every year. For example, let’s say there were hypothetically 75,000,000 ETH in existence, then an annual issuance of 18,000,000 ETH would see the supply increase by 24%. However, in one year’s time, the total supply would be 93,000,000 ETH, so issuing another 18,000,000 over the next year would only represent an increase of 19.35%.

As outlined in the Ethereum white paper, this should show the ETH supply growth rate trend towards zero over time.

Ethereum inflation rate
Despite the linear currency issuance, just like with bitcoin over time the supply growth rate nevertheless tends to zero Ethereum White Paper

In the white paper, Ethereum’s creators also theorized that because coins are always lost over time due to carelessness, death and a number of other reasons, and due to the fact that coin loss can be modeled as a percentage of the total supply per year, the total ETH supply in circulation will eventually stabilize and reach an equilibrium.

Current supply of ETH

At the time of this writing (Dec 18, 2020), CoinMarketCap listed the circulating supply of Ether at 113,888,129 ETH. The chart below shows the growth in the ETH supply over the past couple of years and is a useful tool when examining the ETH inflation rate.

Current supply of ETH
Ether supply growth chart – Dec 18, 2020

Ethereum’s move to proof of stake

Now that we’ve run through the current ETH inflation rate, it’s time to look to the future and realize that the goalposts will soon change. Ethereum will switch from a proof-of-work platform to a proof-of-stake algorithm, which is still in development. This update is known as Casper and is designed to make transactions on the Ethereum network faster and cheaper.

It’s not yet clear what the issuance rate will be after the Casper update, but it’s expected to be much less than the current maximum cap. Ethereum co-founder Vitalik Buterin posted the following on Twitter on June 27, 2017 in response to a question about ETH inflation:

Once Casper comes out, ~0.5-2% annual seems feasible. Once we add partial tx fee burning and if fees go up, may go to 0 or lower.

It’s a good idea to monitor news reports and announcements for further information about when Casper will be launched and the effect it will have on the issuance rate. This will, in turn, help you form a clearer picture of the influence supply will have on the value of ETH in coming times.

Images: Shutterstock

At the time of writing, the author holds IOTA and XLM.

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