As a crypto investor with experience in following Ethereum’s market trends, I find the recent surge in Ether’s circulating supply concerning. Ethereum was previously considered a deflationary asset due to its transition to proof-of-stake and the burning of ETH as transaction fees. However, data from Ultra Sound Money indicates a shift towards an inflationary trend, with a significant increase in the total circulating supply over the past month.
Over the past month, I’ve noticed some noteworthy adjustments in Ethereum‘s supply landscape. Surprisingly low gas fees have led to an expansion in the circulating Ether (ETH) supply. Prior to this, Ethereum had gained a reputation as a deflationary asset following its shift from proof-of-work to proof-of-stake consensus mechanism in 2022. However, recent trends suggest a significant deviation from this narrative.
In the last thirty days, Ultra Sound Money’s data reveals that Ethereum’s supply has expanded by approximately 50,570 Ether. This growth stands out against Ethereum’s earlier deflationary trend following the merge, during which the total circulating Ethereum supply had decreased. Over this timespan, Ethereum experienced the burning of 24,821 Ethers and the issuance of 75,391 Ethers as rewards to validators, leading to a net increase in supply.
Photo: Ultrasound Money
The Impact of Lower Gas Fees
The decrease in gas prices, which fell below $2 several times in May and reached a record low of $1.70 on May 18 since October 2023, is a major cause of the recent change. This price drop can be attributed to the Denascald upgrade, also known as Ethereum Improvement Proposal (EIP) 4844. This update introduced proto-danksharding and replaced calldata, which is gas-intensive, with more efficient Binary Large Objects (blobs). As a result, transaction costs on Layer 2 have been significantly reduced, leading to a decrease in mainnet gas fees by over 90%.
As a researcher studying Ethereum’s economy, I have observed that the decrease in gas fees has positively impacted users by making transactions more affordable. However, this reduction has also led to a lower rate of ETH being burned during transactions. This shift in the burn rate has disrupted Ethereum’s deflationary narrative, which had been a crucial element of its economic model since the implementation of EIP-1559.
As an analyst studying the Ethereum blockchain, I’ve observed that Ultra Sound Money’s latest findings reveal a decrease in the burn rate, leading to an all-time high of approximately 120,000 ETH coins in circulation since early March. In contrast, Ethereum’s current annualized inflation rate stands at roughly 0.4%. This figure is significantly lower than the pre-Merge proof-of-work inflation rate of 3.74%.
Based on existing trends, it’s estimated that Ethereum (ETH) will continue to experience inflation for the upcoming year, adding approximately 450,000 new Ether units to the circulating supply.
Layer 2 Networks and Future Trends
As more and more Layer 2 solutions are adopted, the pressure on Ethereum’s mainnet lessens. However, this relief hasn’t quite reached the point where Ethereum can uphold its deflationary nature consistently. Maintaining a balance between affordably priced transactions and a decreasing supply will be essential as Ethereum progresses.
In the long run, the evolution of network improvements and increasing usage patterns will significantly impact Ethereum’s financial structure and inventory management. The flexibility and inventiveness of the ecosystem will be crucial in maintaining Ethereum’s deflationary nature over time.
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2024-05-24 17:11