Ethereum Surpasses Bitcoin in Supply Growth, Challenging Sound Money Assumptions

Since the September 2022 merge, Ethereum's supply growth rate has been lower than Bitcoin's, challenging the long-standing assumption that Bitcoin is the best form of sound money. Unlike Bitcoin's fixed 21 million supply limit, Ethereum's design is adaptive, allowing its supply to expand or contract based on network activity. Analysis suggests that while Bitcoin ensures absolute scarcity, Ethereum is more adaptive and flexible, able to adjust based on market conditions. If sound money implies a supply expansion, Ethereum has unexpectedly surpassed Bitcoin in this aspect in recent years.

This shift in supply dynamics has significant implications for the cryptocurrency market. As Ethereum's supply growth rate slows, it may lead to increased demand and potentially higher prices. Meanwhile, Bitcoin's fixed supply limit may result in a more stable price, but it could also limit its ability to adapt to changing market conditions. This dynamic could lead to a more diverse cryptocurrency landscape, with different coins serving different purposes.

The Ethereum merge, which transitioned the network from a proof-of-work to a proof-of-stake consensus mechanism, was a significant factor in reducing Ethereum's supply growth rate. By reducing the issuance of new coins, the merge has made Ethereum more scarce, similar to Bitcoin. This change has also made Ethereum more attractive to investors seeking a store of value, as it now offers a more predictable and limited supply.

However, it is essential to note that Ethereum's supply dynamics are still subject to change. The Ethereum Improvement Proposal (EIP) 1559, implemented in August 2021, introduced a base fee that is burned with each transaction, effectively reducing the supply of Ether. This change, combined with the merge, has significantly reduced Ethereum's supply growth rate. However, future changes to the Ethereum protocol could alter these dynamics.

The implications of Ethereum's supply growth rate surpassing Bitcoin's are far-reaching. As Ethereum becomes more scarce, it may become a more attractive store of value, challenging Bitcoin's long-standing dominance in this area. Additionally, Ethereum's adaptability and flexibility may make it more suitable for various use cases, such as decentralized finance (DeFi) and non-fungible tokens (NFTs). As the cryptocurrency market continues to evolve, it will be interesting to see how these dynamics play out and how they shape the future of digital assets.