Ether (ETH), the crypto fuel that powers distributed applications on the Ethereum platform, is distributed at a steady annual linear rate through block mining. This pre-sale fee is 0.3x the amount of ETH to be purchased.

While the best analogy for ETH is “fuel to run the contract processing engine”, we will refer to ETH as a currency for the purposes of this post.

There are two common definitions of “inflation”. The first refers to prices, while the second refers to the total money in a system: the supply or monetary base. Similarly, the term “deflation”. In this post, we will discuss the differences between “price inflation”, the general rise in prices for goods and services in an economy, and “monetary inflation”, the growth of the money supply due to some mechanism of issue. This is often the cause of price inflation.

Despite the fact that ETH is issued annually for a fixed amount, the growth rate (monetary inflation) of the monetary base is not constant. This deflationary currency (in terms of the monetary base) has a declining inflation rate every year, making ETH a more affordable option. Disinflation, or inflation that is less frequent over time, is an exception to the rule.

The amount of ETH lost annually due to transmissions to addresses that are no longer accessible is estimated to be around 1% of the monetary base. ETH can be lost through the loss of private keys, the death of the owner without the transfer of the private key, or intentional destruction via sending to an address that has never generated a private key.

Assuming a 40,000 BTC Ethereum pre-sale at an average price of 1,500 ETH/BTC, 60,000,000 ETH will be generated in the genesis block and allocated to buyers. The mining process will produce 18,000,000 Ethereum per year, resulting in a monetary inflation rate of 22.4%, taking into account both new ETH creation and loss of existing ETH. In the second year, the rate is 18.1%. At the tenth consecutive year, the rate has been 7.0%. In 38 years, it was 1.9%. The level of 1.0% was achieved in 64.

It is expected that BTC will cease to be issued in 2140. As some BTC is likely to disappear each year, the Bitcoin monetary base is expected to start shrinking at this point.

The issuance rate will also be balanced by the expected rate of annual loss and destruction. This dynamic creates a nearly steady state in which the amount of existing ETH ceases to grow. As the economy grows, the demand for ETH is expected to continue to grow at this point, although prices will remain in a deflationary area. This is not a major issue for the system, since ETH is theoretically infinitely splittable. Pricing mechanisms will adjust as long as there is not too much price deflation. Otherwise, the system will run smoothly. The main objection to deflationary economics, sticky wages, will not be an issue as all payment systems are fluid. Another common objection is that borrowers forced to repay loans with currency whose purchasing power increases over time will not face any problems if this is a persistent policy. The terms of the loans will take into account this.

Although the monetary inflation rate is higher than zero for many decades, the price levels (recorded under price inflation and deflation) are determined by supply and demand and are therefore related to the rate (supply) but not completely controlled. Over time, the Ethereum economy is expected to grow at a rate significantly faster than the ETH supply growth, which could lead ETH to appreciate relative to BTC and legacy coins.

One of the main advantages of Bitcoin was its algorithmically set total issuance that only required 21,000,000 BTC. In an age where legacy currency is being wasted in an attempt to fix excessive debt, the prospect of a universally accepted cryptocurrency that can eventually be a stable store of value is attractive. Ethereum recognizes this and strives to replicate this core value proposition.

However, Ethereum also understands that any system designed to be a distributed, consensus-based application platform for global economic or social systems must emphasize inclusivity.