Ethereum Supply Surges by 30,000 ETH In One Month

Ethereum's token supply grows by nearly 30,000 ETH in the last month, challenging its deflationary narrative. L2 adoption and steady on-chain activity contribute to the change.

L2 adoption has contributed to lower gas fees.

In a surprising twist, the Ethereum network has seen its token supply swell by around 30,000 ETH in a single month, or roughly $47 million based on current price. This shift can be partially attributed to the growing popularity of Layer 2 (L2) scaling solutions, which have led to reduced network fees and mainnet usage.

ETH Supply Last 30 Days (Chart: Ultrasound.Money)
ETH Supply Last 30 Days (Chart: Ultrasound.Money)

Recent data from analytics firm L2Beats shows a notable increase in user adoption of L2 scaling solutions, with the Total Value Locked (TVL) in these networks now surpassing $10.5 billion. This represents a doubling in value compared to the figures from a year ago. In contrast, Ethereum's own TVL has suffered, dropping by more than 30% over the past year, from close to $30 billion to just over $20 billion as per DefiLlama statistics.

"Ultrasound Money"

The idea that Ethereum was shifting towards being a deflationary asset gained traction after the introduction of the Ethereum Improvement Proposal 1559 (EIP-1559) in August 2021. This policy implemented a fee-burning mechanism that reduced the number of ETH tokens in circulation. Furthermore, the switch to a proof-of-stake (PoS) consensus model during "The Merge" cut the issuance of new tokens by nearly 90%, substantially lowering the rate of inflation for Ethereum. Together, these factors prompted the emergence of a narrative that ETH was "Ultrasound Money", even more deflationary than Bitcoin.

Previously, miners earned around 13,000 ETH each day in block rewards. With the transition to PoS, this number has plummeted to 1,700 ETH per day. When network congestion is high, more ETH is burned than produced, which has a dampening effect on the supply and potentially boosts the token's price.

Steady Daily Transaction Volumes

However, the increase in Ethereum's token supply over the past month isn't solely due to reduced network activity. Data from TheBlock reveals that Ethereum’s daily transaction count and on-chain volume have remained fairly stable this year. Specifically, the weekly average of daily transactions rose by almost 7%, while the average on-chain volume soared by nearly 80% to around $1.9 billion.

In summary, while Ethereum's adoption of scaling solutions has led to reduced fees and lower network usage, other factors are contributing to its increasing supply. The situation highlights the complex interplay of factors affecting Ethereum's economic model.

Ethereum has still been deflationary since the Merge, with supply reducing by 0.21%. Even if the last month's supply increase were annualized, it would represent 0.3% inflation. For comparison, Bitcoin's inflation is around 1.75%: Still significantly lower than most central banks' 2% target, and far below the actual inflation rates for most developed economies.

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