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 the past month, Ethereum’s supply dynamics have seen significant changes, with unusually low gas fees contributing to an increase in the circulating supply of Ether (ETH). Since Ethereum transitioned from a proof-of-work to a proof-of-stake system in 2022, it has generally been regarded as a deflationary asset. However, recent data indicate a notable shift.
Data from Ultra Sound Money shows that Ethereum’s supply has grown by 50,570 ETH in the last 30 days alone. This increase is a stark contrast to the previous deflationary trend where the total circulating supply of Ethereum had decreased by post-merge. Over this period, Ethereum saw 24,821 ETH burned while issuing 75,391 ETH as block rewards to validators, resulting in a net supply increase.
Photo: Ultrasound Money
The Impact of Lower Gas Fees
A significant factor behind this change is the drop in gas fees. The average average gas prices fell below $2 on multiple occasions in May, reaching a low of $1.70 on May 18, the lowest since October 2023. This decline in transaction costs is attributed to the Dencun upgrade, which introduced proto-danksharding(EIP-4844). This upgrade replaced gas-intensive calldata with more efficient Binary Large Objects (blobs), drastically reducing Layer 2 transaction costs and subsequently lowering the gas fees on the mainnet by more than 90%.
While the reduction in gas fees has been beneficial for users, making transactions more affordable, it has also resulted in a lower burn rate of ETH. The lower burn rate has disrupted Ethereum’s deflationary narrative, which had been a significant 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. Comparatively, Ethereum’s current annualized inflation rate is around 0.4%, which is still lower than Ethereum’s pre-Merge proof-of-work inflation rate of 3.74%.
If the current 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 increasing adoption of Layer 2 solutions, while easing 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 critical 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.
next
