Key Points
- Ethereum’s supply has increased by 50,570 ETH in the past month due to low gas fees.
- The decrease in gas fees has disrupted Ethereum’s deflationary narrative.
Ethereum’s supply dynamics have experienced significant shifts in the past month. The unusually low gas fees have led to a surge in the circulating supply of Ether (ETH).
Since Ethereum switched from a proof-of-work to a proof-of-stake system in 2022, it has typically been viewed as a deflationary asset. However, recent data shows a significant change.
Supply Dynamics and Gas Fees
Information from Ultra Sound Money reveals that the supply of Ethereum has grown by 50,570 ETH in just the last 30 days. This increase contrasts with the previous deflationary trend where the total circulating supply of Ethereum had decreased post-merge. During this period, Ethereum burned 24,821 ETH while issuing 75,391 ETH as block rewards to validators, leading to a net supply increase.
A substantial reason behind this change is the decline in gas fees. The average gas prices fell below $2 several times in May, reaching a low of $1.70 on May 18, the lowest since October 2023. This drop in transaction costs is due to the Dencun upgrade, which introduced proto-danksharding(EIP-4844). This upgrade replaced gas-intensive calldata with more efficient Binary Large Objects (blobs), significantly reducing Layer 2 transaction costs and thus decreasing the gas fees on the mainnet by over 90%.
Impact on Ethereum’s Deflationary Narrative
The reduction in gas fees, while beneficial for users by making transactions more affordable, has also led to a lower burn rate of ETH. This lower burn rate has disrupted Ethereum’s deflationary narrative, a major aspect of its economic model since the implementation of EIP-1559.
According to Ultra Sound Money, the decrease in the burn rate has pushed the number of circulating coins to its highest level since early March, currently averaging 120,000 ETH. In contrast, Ethereum’s current annualized inflation rate is around 0.4%, still lower than Ethereum’s pre-Merge proof-of-work inflation rate of 3.74%.
If this trend continues, projections suggest that ETH will maintain an inflationary trend over the next year, with a net gain of over 450,000 ETH released into circulation.
Layer 2 Networks and Future Trends
The growing adoption of Layer 2 solutions, while reducing the load on Ethereum’s mainnet, has not yet reached a level sufficient to maintain Ethereum’s deflationary status. The balance between transaction cost reductions and maintaining a deflationary supply will be crucial as Ethereum continues to evolve.
Future network upgrades and broader adoption trends will play a significant role in shaping Ethereum’s economic model and supply dynamics. The ecosystem’s ability to adapt and innovate will determine whether Ethereum can retain its deflationary status in the long term.