01 Jun 2021 10:43 AM +00:00

Does Ethereum have a cap?

When discussing cryptocurrency, the most popular coin after Bitcoin is Ethereum. First released in 2015, Ethereum is the second-largest cryptocurrency. It holds 18.4% of the total cryptocurrency market cap (via CoinMarketCap).

Despite being described as an 'Altcoin', Ethereum is pretty different from Bitcoin. Aside from using a Proof-of-Stake (PoS) algorithm instead of Bitcoin's Proof-of-Work (PoW), the supply of Ether is different from that of Bitcoin.

Here's everything you need to know about Ethereum's total supply, and any future changes.

Does Ethereum have a max cap?

Unlike Bitcoin, Ethereum has no limits on its total amount. There is a max cap on Bitcoin of 21 million, but such restrictions do not apply to Ethereum. Over 116,000,000 ETH are in circulation as of May 2021.

However, there are still some limits on the supply of Ethereum that means it would be incorrect to say it has an 'unlimited supply'. It has a cap of 18 million ETH per year (or 2 ETH/block) - 25% of Ethereum's initial supply. These limits are similar to Dogecoin's cap of 5 billion DOGE each year.

Vitalik Buterin, Ethereum's founder, explained this decision in the Ethereum Whitepaper:

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The permanent linear supply growth model reduces the risk of what some see as excessive wealth concentration in Bitcoin, and gives individuals living in present and future eras a fair chance to acquire currency units, while at the same time retaining a strong incentive to obtain and hold ether because the "supply growth rate" as a percentage still tends to zero over time. We also theorize that because coins are always lost over time due to carelessness, death, etc, and coin loss can be modeled as a percentage of the total supply per year, that the total currency supply in circulation will in fact eventually stabilize at a value equal to the annual issuance divided by the loss rate (eg. at a loss rate of 1%, once the supply reaches 26X then 0.26X will be mined and 0.26X lost every year, creating an equilibrium).

However, some upcoming changes to Ethereum must be noted.

Future Limits on Ethereum Supply

On 1 April 2018, Buterin posted an Ethereum Improvement Proposal (EIP) that would see the supply capped at 120,000,000 ETH. While many saw this as an April Fool's Joke, Buterin clarified on Twitter that it was a "meta-joke" worth considering seriously.

While this cap has yet to come to fruition, the upcoming EIP-1559 update has important ramifications for the Ethereum supply.

Set to release in July, EIP-1559 will mark a shift in the way Ethereum transactions are processed and paid for. In terms of its impact on Ethereum supply, the Ethereum traditionally sent to miners as part of this transaction will instead be sent to the network and 'burned'. This will, in theory, stunt Ethereum's inflation as more transactions occur and more Ethereum is burned, rather than going to cryptocurrency miners.

As explained in the EIP-1559 GitHub page, Ethereum has the potential to become deflationary:

If more is burned on base fee than is generated in mining rewards then ETH will be deflationary and if more is generated in mining rewards than is burned then ETH will be inflationary.

READ MORE: How many Cryptocurrencies are there in 2021?

[Featured Photo by Executium on Unsplash]