The supply of Ethereum has surged due to decreased transaction activity, raising inflation concerns about its long-term financial health.
Ethereum, the second-largest cryptocurrency by market capitalization, recently saw its supply increase by $47.9 million in just a month, making its supporters wonder whether it is experiencing inflation. While many celebrated the transition from proof of work to proof of stake, which reduced ETH issuance by 90%, recent events tell a different story.
Also Read: Ethereum Supply Dynamics: A Deep Dive into Changing Trends
The Ethereum Merge and Expectations
Last year, the Ethereum community eagerly anticipated the merge—a historic transition that was to solidify ETH as “ultrasound money.” This was a significant move, considering that most Ethereum maximalists believed it would make ETH a deflationary asset, meaning its value would only rise over time. The merge was successful in reducing ETH issuance by a significant 90%.
However, recent statistics shed light on a different aspect. Data from the aggregator ultrasound.money reveals a surge in the global ETH supply by approximately 30,000 ETH in just 30 days. This growth equates to an increase of around $47.9 million.
Drop in Ethereum Network Transactions
One of the major factors influencing this surge is the marked decrease in transaction activities on the Ethereum network. A notable decline in both NFT trades and DeFi activities on the platform can be linked to this increase in ETH circulation.
A fundamental understanding of how the Ethereum network operates provides insights into this dynamic. Introduced in 2021, the Ethereum network began using a fee-burning mechanism. This mechanism works in the following way: As the traffic or transaction volume increases on the network, so do the gas prices. Gas prices are essential for completing on-chain transactions. And, the higher these prices, the more Ethereum the system “burns” or removes permanently from circulation.
Low Ethereum Gas Fees: Blessing or Curse?
Interestingly, the Ethereum gas fees have experienced a significant drop. An average transaction now costs around 7 gwei, translating to about $0.24. When comparing this to the transaction costs on NFT marketplace OpenSea, an average transaction comes to roughly $0.94. However, this wasn’t the case over a year ago. To put things in perspective, during Yuga Labs’ Otherside collection sale, users burned Ethereum worth over $157 million to mint merely 55,000 virtual land deed NFTs, with each transaction’s fee averaging at a whopping $2,854.
While such low gas fees can be beneficial for the average Ethereum user, it has a flip side. The reduced fees lead to the burning of lesser ETH, causing a spike in the global ETH supply.
Concerns Around Ethereum’s Financial Health
These recent trends raise eyebrows and cause concern among crypto enthusiasts and investors. The rising Ethereum supply has led many to question the network’s long-term financial health. Is Ethereum losing its deflationary characteristic?
However, Ethereum’s core development team doesn’t seem to share these concerns. Micah Zoltu, a core developer at Ethereum, believes the current trend is trivial in the grand context. Likewise, Danno Ferrin, another prominent name in the Ethereum developer community, holds that the recent inflationary tendencies of Ethereum remain below the all-time highs. He further points out that the short-term Ethereum inflation rate is still more favorable compared to other blockchain networks and the general economic landscape.
Inflation has been a growing concern, not just for cryptocurrencies but also globally. Especially in the United States, where the inflation rate last June saw the most significant year-over-year increase since 1981. The U.S. Federal Reserve has responded by consistently hiking interest rates. These moves adversely impact cryptocurrencies like Bitcoin and Ethereum, leading to their value depreciation.