Ethereum“The Merge”: A Milestone in Monetary Policy Reform
Ethereum "The Merge" is the most critical step in the multi-phase upgrade plan for Ethereum 2.0; it marks the Ethereum network’s complete transition from the energy-intensive Proof-of-Work (PoW) consensus mechanism to the efficient Proof-of-Stake (PoS) mechanism.The Beacon Chain, serving as the PoS consensus layer, was launched on December 1, 2020, while the “Merge” between the Ethereum mainnet (execution layer) and the Beacon Chain was completed on September 15, 2022.This transition not only significantly enhanced the network’s sustainability but also had a profound impact on Ethereum’s monetary policy.
Prior to this, Ethereum implemented the EIP-1559 proposal via the London hard fork in August 2021. This proposal introduced a transaction fee burning mechanism, permanently burning a portion of the base fee from each transaction, thereby laying the foundation for Ethereum’s deflationary characteristics.
Significant Changes in ETH Supply and Inflation Rate
Following “The Merge,” the ETH supply on Ethereum decreased significantly. Under the PoW mechanism, miners received approximately 13,000 ETH in daily issuance; after the Merge, only about 1,700 ETH per day is allocated to stakers, resulting in an approximately 88% reduction in the total new ETH supply.
- Annualized Issuance Rate Before the Merge: The total annual issuance rate for the Ethereum mainnet and Beacon Chain was approximately 4.39%.
- Annualized issuance rate after The Merge: Based on approximately 14 million ETH staked, the annualized issuance rate has dropped to about 0.52%.
- Inflation and Deflation Dynamics: Due to the EIP-1559 fee-burning mechanism, Ethereum experienced net deflation during certain periods following the Merge, earning it the nickname “Ultrasonic Money.”However, according to a report dated February 21, 2026, Ethereum’s circulating supply has increased by more than 950,000 ETH since the Merge, with an annualized inflation rate of approximately 0.23%.This indicates that Ethereum’s monetary policy has shifted from a narrative of sustained deflation to moderate inflation; however, its inflation rate remains far below pre-Merge levels and is lower than the rate of supply growth for Bitcoin, thereby reinforcing its scarcity.
Staking Mechanism and the Shanghai Upgrade
Following the transition to PoS, ETH holders can participate in network validation and earn rewards by staking their tokens, replacing the role of miners under PoW. As of this writing, the total amount of staked ETH is approximately 42.5 million, accounting for about 34% of the total ETH supply. Ethereum The current staking reward rate fluctuates dynamically, typically ranging from 1.76% to 2.90%, depending on the total amount of staked ETH (the higher the staked amount, the lower the reward rate).
In April 2023, Ethereum completed the Shanghai/Capella upgrade. This significant update allows stakers to withdraw their staked ETH and rewards, resolving the previous liquidity issue where staked ETH could not be retrieved, and further enhancing the flexibility and appeal of the staking mechanism.
Impact on the Ecosystem and the Environment
Ethereum Following the transition to PoS, energy consumption is expected to decrease by approximately 99.95%, making it a more environmentally friendly blockchain platform. However, it is important to note that “The Merge” itself is not a scaling solution and will not directly reduce transaction gas fees. Gas fees are primarily influenced by the demand for block space and are unrelated to the consensus mechanism.Future sharding and Layer 2 scaling solutions will play a significant role in improving scalability and reducing gas fees.
Summary
Ethereum’s “Merge” and its subsequent upgrades—particularly EIP-1559 and the Shanghai upgrade—have collectively reshaped ETH’s monetary policy.By drastically reducing the issuance of new tokens, introducing a fee-burning mechanism, and optimizing staking liquidity, Ethereum aims to achieve the monetary goal of “minimum necessary issuance,” thereby reinforcing its status as a scarce digital asset. These changes not only enhance the network’s efficiency and sustainability but also lay a solid foundation for ETH’s long-term value proposition.
