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 121.97M ETH are in circulation as of August 2022.

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:

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.

Read More: Ethereum Gas Prices After The Merge: ETH Holders Hoping To See Gas Prices Fall With Merge

Is Ethereum Deflationary?

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.

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.

The EIP 1559 update released in July 2021 has certain similarities that can make ETH pose as a deflationary crypto asset. The update has considerably changed how gas fees are calculated by deploying a burning mechanism. This burning mechanism destroys ETH at a given time. However, this update doesn't make Ethereum completely deflationary in nature but it does impacts it's availability to a certain extent. As per the data from Watch the Burn, Till now,nearly 2,585,855 ETH has been burned.

As the merge date has already been declared, another important ethereum triple halving update is also drawing closer, which is set to add deflationary pressure on Ethereum, which in turn may affect its price and supply.

READ MORE: Ethereum Merge Price: Latest ETH price as Ethereum nears merge date

[Featured Photo by Executium on Unsplash]