Back in 2014, Joseph Luben explained the monetary policy of ethereum for his blog. This article is still valuable as illustrates how inflation principle replaces simple limitation of token supply in Ethereum economics.

Firstly, he asks to distinguish between two inflations: “price inflation,” the rise in the general price level of goods and services in an economy, and “monetary inflation,” the growth in the supply of money in an economy due to some sort of issuance mechanism.

The Ethereum supply algorithm is assumed to generate 18 millions ETH each year. As the initial supply was 60 mln, it means that the monetary inflation rate should decrease year to year (22% in 1st year, 18% in 2nd, approximately 1% in year 39).

It is expected that this mechanism will allow the Ethereum’s monetary base not to shrink due to losses of private keys of holders (the problem that is very sensitive for supply-limited coins like Bitcoin) and, therefore, not to experience dramatic price changes after the supply stops.

Nevertheless, it is believed that growth of user base will attribute to price inflation as growing activity will require more movement of coin.

“Over time it is anticipated that growth of the Ethereum economy will significantly outpace growth of the supply of ETH, which could lead to an increase in the value of ETH with respect to legacy currencies and BTC”