Currently, ETH is already DEFLATIONARY. This can be seen via ultrasound.money
The reason why Ethereum’s development team wants to transition to proof of stake is primarily to make it energy-efficient.
Ethereum’s present consensus mechanism relies on mining in which computer chips are used to solve cryptographic puzzles. While proof of work is effective, it’s considered to be highly energy intensive and mining resulting in high amounts of carbon emissions. It is estimated that the Ethereum network consumes ~75 terawatt-hours per year (TWh/yr), which is about the same as Austria’s annual power consumption.
This is different in a proof-of-stake system, where the blockchain is secured by validators who are selected by staking tokens. Validators on Ethereum must stake 32 ether ($48,000) to be eligible. Anyone can be a validator node as long as they meet the stake requirement. Users can also pool their assets together by delegating their tokens to a validator and sharing in the rewards.
By putting up their own assets as collateral, users accept the risk that if they act maliciously, their stake could be slashed and they could lose their own funds. This is the incentive to be a positive actor on the network. It’s similar to miners who have to invest in mining equipment and pay for electricity to mine blocks. The idea is that it makes it more beneficial for network operators to behave positively than try to attack the network.
But by removing the mining process and replacing it with staking, this eliminates the steep costs related to acquiring expensive hardware and lots of electricity. As such, it has the potential to make the Ethereum project much more energy-efficient and reduce its carbon footprint.
The Ethereum team has predicted that switching off Ethereum's proof of work mechanism in favor of proof of stake will drastically cut down on this power expenditure by about 99.95%, resulting in an annual energy expenditure of 0.01 TWh/yr.
The coming Merge has economic ramifications too. The Ethereum blockchain will face a huge reduction in issuance as soon as it upgrades to the new consensus mechanism. As such, there is potential for ether’s token supply to become deflationary.
Per current estimates, the rate of new ether creation will drop nearly 90% after The Merge due to the fact validator rewards will be significantly smaller than the miner rewards issued on proof of work.
A recent blog post on Ethereum’s main community website stated its proof-of-work chain pays 13,000 ETH each day to miners. After The Merge, the site estimated roughly 1,600 ETH will be paid in validator rewards, thus a reduction of 88%.
This fall in issuance comes not long after Ethereum introduced a burn fee. This is a fee on every blockchain transaction that doesn’t go to the miner (or the validator) but is burned and made inaccessible. The idea here is to slowly reduce the supply of ether over time.
Since the burn fee was introduced, more than 2.6 million ETH has been burned, worth about $3.76 billion at the current price of ether.
As a result, the Ethereum network will be issuing much less ETH each year and it will also continue to burn a large amount of ETH each year. If it burns more than it issues, then the network will be deflationary — with its supply decreasing every year instead of increasing.
This will likely happen if the average gas price — a core part of transaction fees — is above 16 gwei.
Currently, ETH is already DEFLATIONARY. This can be seen via ultrasound.money
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