Ethereum Returns to Inflation, ETH Supply Higher Than Before The Merge
Ethereum has returned to inflation as the amount of ETH burned is lower than the amount of new ETH issued. Many analysts believe that the reason is because the Dencun upgrade has reduced the rate of gas fees burned. And ETH is expected to be even more inflated after the upcoming Pectra upgrade.
Ethereum Inflation Returns
According to data from ultrasound.money, the ETH supply has increased to its highest level since January 2023, the first time it has exceeded the number recorded before The Merge.
Specifically, the Ethereum supply is currently at 120,521,794 ETH, 654 ETH higher than on September 15, 2022 - the time The Merge took place.
The reason for taking The Merge as a milestone is because this is a landmark event for the second largest coin in the market. Not only did it switch from Proof of Work to Proof of Stake, but ETH also became a deflationary currency, as the amount of tokens burned was higher than the amount of newly issued tokens.
In more detail, Ethereum users will have to pay a fee in gas when making transactions, and then most of the gas will be burned. From there, the more the network operates, the more ETH will be burned > surpassing the amount of newly issued ETH > deflation.
This is the reason why, after a while after The Merge, Ethereum was praised as "Ultrasound Money", an asset with a decreasing total supply, even considered a superior store of value than Bitcoin.
But all of that has gradually ended since the Dencun upgrade was successfully deployed on March 13, 2024. As Coin68 explained, Dencun is causing Ethereum to inflate again, because of the EIP-4844 proposal introducing a new block structure called “blobs” that significantly optimizes transaction fees on Layer-2.
Therefore, Dencun brings many benefits to L2 but is disadvantageous to the mainnet. Although the activity on Ethereum has not decreased, when a large number of transactions move to blobs > the rate of gas fees burned decreases > ETH inflates again.
Not only that, the inflation rate is expected to increase even higher after the Pectra upgrade scheduled for next March. Pectra comes with the EIP-7623 proposal, which increases the maximum blob size per block from 6 to 8 and the blob target from 3 to 4.
However, to be fair, Ethereum's current inflation rate is still lower than Bitcoin's, as BTC has an inflation rate of 1.43%/year since The Merge.
Weak ETH performance due to a series of scandals
Thus, L2 will benefit even more after Pectra, but ETH is likely to inflate even more. This pessimistic outlook, along with recent scandals surrounding the second largest project in the market, is pushing investors further away from Ether.
First is the rise of Solana with the "memecoin super cycle", causing users to leave Ethereum because of its slow speed and high fees and flock to Solana.
Next is the controversy surrounding the Ethereum Foundation's continuous ETH dumping and criticism surrounding the organization's leadership. So far, there is no sign that EF will have a change in leadership, or adjust according to community requests.
In terms of price, ETH had a record correction on February 3, hitting its lowest level since March 2021.
The world’s second-largest cryptocurrency is losing ground to Bitcoin, with the ETH/BTC ratio falling to 0.028, its lowest in four years. ETH/BTC peaked above 0.08 in 2022, but the ratio has been steadily declining since then.
While BTC is up 121.4% in 2024, ETH is much less bullish, up just 46.29% according to CoinGecko.
Institutional investor interest is also evident. While the Bitcoin spot ETF has seen $40.6 billion in inflows since its launch, the Ethereum spot ETF has seen just $3.2 billion. However, it’s worth noting that the Ether ETF is months behind its big brother.
