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Ethereum supply to shrink after 'Merge' upgrade, says Vitalik Buterin

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DENVER, CO - FEBRUARY 18: Ethereum co-founder Vitalik Buterin speaks at ETHDenver on February 18, 2022 in Denver, Colorado. ETHDenver is the largest and longest running Ethereum Blockchain event in the world with more than 15,000 cryptocurrency devotees attending the weeklong meetup. (Photo by Michael Ciaglo/Getty Images)
Ethereum co-founder Vitalik Buterin discussed the upcoming 'Merge' in which Ethereum will make a full transition from proof-of-work to a low energy intensive proof-of-stake mechanism for validating on-chain transactions. Photo: Michael Ciaglo/Getty

Ethereum will change its monetary policy in the long-awaited 'Merge' upgrade, with the annual issuance of its ether (USD-ETH) cryptocurrency to be slashed by up to 90%.

That sets the stage for ethereum to become deflationary, meaning that a greater sum of its native cryptocurrency, ether, will be burned than created.

Ethereum co-founder Vitalik Buterin took to the stage at the Ethereum Community Conference (EThCC) in Paris on Thursday to lay out the roadmap for the "smart contract" blockchain.

Read more: Crypto live prices

Buterin discussed the upcoming "Merge" in which Ethereum will make a full transition from proof-of-work (PoW) to a low energy intensive proof-of-stake (PoS) mechanism for validating on-chain transactions.

Ethereum was trading up 38% in the last seven days, standing at around $1,544 (£1,290) at the time of writing.

Bitcoin (USD-BTC) also performed well, up 13.4% this week, and hovering around the $23,000 mark.

Buterin announced that the blockchain's "monetary policy is changing".

He said that the switch from PoW to PoS is going to decrease the issuance of ether from 5 million per year to become controlled by an equation that is dependent on the amount of ether staked.

He said: "In all cases, it decreases the amount of ether issued by a lot.

"It's not a fixed amount of issuance anymore, but it is much lower than it used to be.

"So in this way the monetary policy is changing."

This will lower the supply of ether in circulation as "stakers", who will become the new "miners", will be taking ether out of the market and staking them to form validator nodes.

Read more: The Crypto Mile weeky update from EthCC in Paris

The staking process, and the decrease in the issuance of ether on an annual basis, will decrease the supply of the cryptocurrency and could, given the right market conditions, increase the value of the token.

Ethereum's EIP-1159 burns the base fee of transactions on the blockchain, permanently removing those tokens from circulation, lowering the supply of ether forever.

Ethereum is currently issuing new ether at a rate of 4% per year, although this is expected to decrease to around 0.5-1% as a part of the Ethereum 2.0 "Merge" to a PoS consensus mechanism.

Discussing the Merge's long-term and short-term outcomes, Buterin said, "After the Merge, you will be able to build an Ethereum client that does not even know the proof-of-work phase even happened."

The co-founder of Ethereum then spoke about the coming "Surge" update that will make transactions on the network faster and cheaper.

Read more: The Crypto Mile: Has bitcoin reached the dip or will it fall even further?

He said: "At the end of this road map, Ethereum will be a much more scalable system.

"By the end, Ethereum will be able to process 100,000 transactions per second."

Watch: The Crypto Mile weekly update from EthCC in Paris

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