Monetary Policy

Summary: Minimum Necessary Issuance

Ethereum's Monetary Policy is defined by the rewards that are paid out by the protocol at any given time. Ethereum's current yearly network issuance is approximately 4.5% with 2 Ether per block and an additional 1.75 Ether per uncle block (plus fees) being rewarded to miners.

Ethereum does not have a fixed supply because a fixed supply would also require a fixed security budget for the Ethereum network. Rather than arbitrarily fix Ethereum's security, Ethereum's monetary policy is best described as "minimum issuance to secure the network".

Ethereum has had a history of reducing issuance to these estimated minimums and the network has never increased issuance. The move to proof-of-stake is also part of Ethereum's effort to reduce issuance to minimum amounts without sacrificing security.

Ethereum's minimum necessary issuance policy is enforced by a wide range of stakeholders within the ecosystem - including:

Developers

Community members

Ecosystem spokes/projects

Miners and other network participants

As Ethereum is a decentralized network, the Monetary Policy cannot be successfully modified unless there is overwhelming consensus from the aforementioned stakeholders. Ethereum follows an off-chain governance process meaning that any and all decisions on changes to the network happen extra-protocol.

That said, due to natural incentives, Ether's issuance is unlikely to ever increase unless the security of the network is at risk. Additionally, the upcoming Ethereum 2.0 proof-of-stake transition will progressively allow for a drastic reduction of Ether issuance while maintaining the same level of network security.

Important Events

Genesis Block

As part of the Ethereum genesis block, initial contributors to Ethereum sale were allocated 60,000,000 Ether. Another 12,000,000 Ether was given to the development fund which was distributed among early contributors and the Ethereum Foundation.

Historical Issuance Impacts

Block Reward Reductions

Every block produced on the Ethereum network has an associated block reward which incentivizes miners to support the network. On top of the base block reward, miners that find an uncle block receive ~75% of the current block reward. This results in a growing supply of Ether across time. The history of the block reward are as follows:

Block 0 to Block 4,369,999: 5 Ether

Block 4,370,000 to 7,280,000: 3 Ether (changed via EIP-649)

Block 7,280,000 to now: 2 Ether (changed via EIP-1234)

Other Events

Issuance rate is also impacted by the speed of blocks. There have been a few other events in Ethereum's history which has impacted the issuance rate. Some planned and some not planned.

The Homestead fork in March 2016 saw a decrease in block times and therefore a temporary increase in issuance rate.

In late 2016, the network was under DDoS attack. This increased the uncle rate, therefore causing a temporary rise in issuance rate.

In mid 2017, a mechanism called the difficulty bomb (or "Ethereum Ice Age") started to kick in. This meant that the difficulty of mining a block rose, therefore slowing down blocks. This resulted in a dramatic decrease in issuance rate.

In late 2017, the Byzantium fork was released which delayed the difficulty bomb and also reduced block rewards from 5 to 3.

In early 2019, after a few months of difficulty bomb activation, the bomb was reset and block rewards were reduced from 3 to 2 in the Constantinople fork.

In early 2020, the Muir Glacier fork reset the difficulty bomb.

Proof of Stake Impact

According to the current Eth 2.0 spec, issuance rate will be greatly reduced as a part of Proof of Stake. There will be a sliding scale between total amount of Ether at stake and annual interest earned by stakers. The current spec would produce the following annual interest and inflation numbers based on total network stake:

ETH validating Max annual issuance Max annual network issuance % Max annual return rate (for validators) 1,000,000 181,019 0.17% 18.10% 3,000,000 313,534 0.30% 10.45% 10,000,000 572,433 0.54% 5.72% 30,000,000 991,483 0.94% 3.30% 100,000,000 1,810,193 1.71% 1.81%

Historical and Future Supply Forecast

There are two majors upcoming factors when it comes to Ethereum's issuance rate and supply curve. They are:

Eth2 Phase 0: Slight bump in issuance due to Beacon Chain launch.

Eth2 Phase 1.5: PoW rewards will be removed due to Eth1 PoW chain being moved into a shard on the Eth2 chain. This means that the only rewards on chain will be to PoS validators, using the chart above.

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