The “Supply” KPI in the context of cryptocurrency refers to the total number of tokens or coins in existence for a particular cryptocurrency project. In the case of Ethereum (ETH), the supply metric is crucial in understanding how many ETH tokens are in circulation, how new tokens are created, and how they are distributed. Let’s explore the “Supply” KPI with Ethereum as an example:
KPI: Supply
Example: Ethereum (ETH)
Ethereum’s supply can be categorized into three main components:
Total Supply: This represents the maximum number of ETH tokens that can ever be created. In the case of Ethereum, the total supply is determined by the network’s rules, specifically its issuance policy. Ethereum initially had an issuance policy known as “proof of work” (PoW), where new tokens were created as rewards for miners who validated transactions. Ethereum 2.0, the network’s upgrade, is transitioning to “proof of stake” (PoS), which will change how new tokens are created. The total supply is capped, and it’s currently over 100 million ETH.
Circulating Supply: The circulating supply refers to the number of ETH tokens that are actively in circulation, available for trading, and held by the public. It excludes tokens that are locked, reserved, or not actively traded. This metric is essential for determining the market cap and understanding the liquidity and trading dynamics of Ethereum.
Max Supply: The “Max Supply” metric is typically equal to the “Total Supply” when the cryptocurrency’s issuance is fully complete. However, Ethereum, like many other cryptocurrencies, does not have a fixed maximum supply because the transition to Ethereum 2.0 involves changes to the issuance policy. The “Max Supply” represents the theoretical maximum if all protocol rules are followed.
Understanding the supply KPI is important for several reasons:
Inflation and Deflation: It helps users and investors understand whether the cryptocurrency’s supply is inflationary (new tokens are regularly created) or deflationary (supply decreases over time). In the case of Ethereum, it’s moving from an inflationary model under PoW to a deflationary model under PoS.
Monetary Policy: It provides insight into the monetary policy of the cryptocurrency. For example, Ethereum’s issuance policy is an essential factor that affects its supply.
Market Cap: The circulating supply is a key component in calculating market capitalization, a widely used metric to determine a cryptocurrency’s overall value in the market.
Investor Confidence: A clear and well-understood supply model can influence investor confidence and the perception of a cryptocurrency’s scarcity and value.
Network Security: In proof-of-work blockchains like Ethereum’s PoW, the supply plays a role in the security of the network, as it determines how miners are rewarded.
Tokenomics and Investment: It’s a critical factor in evaluating the tokenomics of a cryptocurrency and understanding its long-term investment potential.
In the case of Ethereum, the transition to Ethereum 2.0 is a significant event that will affect the supply KPI, moving it from a PoW model with variable issuance to a PoS model with a more predictable and potentially deflationary supply. Investors and stakeholders need to stay informed about these changes when considering Ethereum as an investment or for other use cases.