Why is Ethereum capped at 21 Million?
Unlike government fiat currencies, ethereum is digitally limited. But why exactly is ethereum limited to 21 million units?
Ethereum Whitepaper
The limit of ethereum is not mentioned in the whitepaper, however Vitalik Buterin, the inventor of ethereum, points out the limit with the following statement:
The total circulation will be 21,000,000 coins. It will be distributed to network nodes as they form blocks, with the amount halved every four years.
First 4 years: 10.500.000 Coins next 4 years: 5.250.000 Coins next 4 years: 2.625.000 Coins next 4 years: 1.312.500 Coins etc.
When that expires, the system can support transaction fees if needed. It is based on open competition, and there will probably always be nodes willing to process transactions for free.
What is Ethereum Halving?
When miners mine ethereum, they receive a reward for doing so, called a block reward. This is made up of transaction fees and block subsidy.
In the first 4 years, ethereum miners received 50 ethereum per block for this. However, every 210,000 blocks, or the equivalent of every four years, Ethereum halving occurs. The block subsidy for the Ethereum mined is halved in each case.
So far, there have been the following ethereum halvings:
- November 2012: Reduction to 25 ethereum per block.
- July 2016: Reduction to 12.5 ethereum per block
- May 2020: reduction to 6.25 ethereum per block
Conclusion
Probably not the 21 million ethereum, but the 50 ethereum per block was at the beginning in the consideration. Because the 21 million is also the mathematical consequence. It is obtained by multiplying the number of blocks produced (210,000 per halving period) by the sum of the halving rewards (50 ethereum+ 25 ethereum+ 12.5 ethereum + 6.25 ethereum + ...0 ≈ 100).
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