About An Deflationary Ethereum

Deflationary ETH means there is more EIP1559 BASE_FEE ETH burned from transactions than ETH issued/created.

Will Ethereum circulation drop to zero? Will it just keep going down slowly? Or will it find an equilibrium?

I see so much online material extrapolating current BASE_FEE burn rate on top of a soon-to-be lower POS issuance rate. Most add the remark that it's deflationary during high network activity… But that's not the whole picture.

I'll try to explain through an example. Let's say a simple transaction costs 100 Smidgens BASE_FEE. Is that a lot or a little? Well… the answer depends on how much a Smidgen is worth to you. It's the same thing with Gwei. How much is a Gwei worth in Dollars or Euros? Blockchain demand is based on how much a transaction is worth to you!

What happens if ETH goes up 10x in value? To continue being deflationary the BASE_FEE would have to hold constant. That means the Dollar/Euro/Smidgen cost of a transaction also goes up 10x. Would you make as many transactions if it cost 10x more? Likely not. i.e. demand for blockspace would drop.

Now you see this is a game of equilibrium. Low ETH $dollar price and high demand causes deflation. Deflation makes ETH rarer – raising the cost of ETH – making Gwei BASE_FEE transactions more expensive – lowering blockspace demand – reducing Gwei burned – making ETH less deflationary or even inflationary.

You see… it's a beautiful dance trying to find an equilibrium.