November 9th ETH annual supply rate went below zero and became deflationary for the first time post Merge according to ultrasound.money . This simply means that more ETH tokens are being burned via transactions than tokens being created.

This was due in a large part to the collapse of the FTX platform and the unusually high number of transactions on the network resulting in increased ETH gas fees and increased burn rate. On Wednesday 11/9/22 more than 5,000 ETH were burned and more than 13,000 ETH burned in a three day period according to Etherscan.

With the Proof of Work to Proof of Stake transition ETH issuance has dropped drastically going from roughly 13,000 ETH per day going to the POW miners to 1,600 ETH per day going to validator rewards equating to a 90% drop in issuance. 

The rate of issuance now depends on the number of validators operating a node and earning staking rewards. The greater the number of validators the higher the issuance rate is to reward validators resulting in a lowered validator rate of earning interest.

Will Ethereum remain deflationary in the short term ? Probably not with being mired in a bear market and decreased network activity. The increased network activity on layer – 2 protocols where dapps run at a fraction of of the cost to users also plays a part.

At this time ETH is deflationary when gas fees are above 15.3 gwei. It is at this point more ETH is being burned than rewarded to the validators.

The switch from POW to POS for Ethereum has been referred to as the ” triple halving ” with the reduction in rewards and could be a game changer for the second largest cryptocurrency even though that is not currently reflected in the price.

Long term I believe this is bullish for Ethereum. Even if deflation is not achieved it certainly is a much lower rate of inflation which will create investor optimism.