Ethereum fans widely hyped last year’s merge as a decisive event that would permanently establish ETH as “ultrasound money.” Ethereum’s historic transition from proof of work to proof of stake last September reduced ETH issuance by 90%; many so-called Ethereum maximalists were convinced the change would clinch ETH’s status as a deflationary currency that would only, thereafter, appreciate in value.
A year later, things aren’t looking so certain.
In the last 30 days alone, global ETH supply has surged by nearly 30,000 ETH, equivalent to roughly $47.9 million at writing, according to data aggregator ultrasound.money. That sharp uptick in the amount of ETH in circulation is mostly thanks to an equally stark decline in transaction flow on the Ethereum network: far fewer NFT trades, and much less DeFi activity.
Since 2021, the Ethereum network has operated on a fee-burning mechanism: the more traffic on the network, the more gas prices—which are required to complete on-chain transactions—rise. The higher gas prices are, the more ETH is “burned” by the network, or permanently removed from circulation.
As of late, Ethereum gas fees have dropped remarkably low—an average network transaction currently costs 7 gwei, or just $0.24. An average transaction on NFT marketplace OpenSea costs about $0.94. Contrast that with just over a year ago: during the sale of Yuga Labs’ Otherside collection last May, for example, network users burned over $157 million worth of Ethereum to mint just 55,000 virtual land deed NFTs: an average of $2,854 in fees alone per transaction.
While low gas fees might be good for the average Ethereum user, they also lead to the burning of less ETH—and thus, surges in global ETH supply.
Is Ethereum becoming inflationary again?
Yes, it is, and that’s because Ethereum fees, which are supposed to burn ethers, are everywhere but not on Ethereum: its own L2s (Arbitrum, Polygon, etc.) and EVM competitors (BNB, Avalanche C, etc.)
Limiting L1 dooms cryptocurrencies. pic.twitter.com/cE82gwUbZR
— Nikita Zhavoronkov (@nikzh) September 23, 2023
Ethereum’s recent inflationary trend has caused some concern among crypto users and investors who fear current trends may spell trouble for the network’s long-term financial health.
But the team behind Ethereum appears largely unconcerned about the development.
“I suspect that none of the core devs care,” Micah Zoltu, an Ethereum core developer, told Decrypt of his colleagues’ attitudes on the subject. “If you look at the grand scheme of things, it is insignificant.”
Danno Ferrin, another Ethereum core developer, said he had not been concerned by Ethereum’s recent inflationary kick.
“It is still below the all-time high [ETH supply],” Ferrin told Decrypt. “And [Ethereum’s] short-term inflation is well below other chains and the economy as a whole.”
Inflation has been consistently on the rise globally since last year; in the United States, prices rose last June at the sharpest year-over-year rate recorded since 1981. In response to this economic climate, the U.S. Federal Reserve has repeatedly raised interest rates, a move that has persistently lowered the values of cryptocurrencies like Bitcoin and Ethereum.
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