Ethereum, the second-largest cryptocurrency by market capitalization, has seen a significant increase in its token supply in the past month, raising concerns about its inflation rate and impact on prices.
According to data from ultrasound.money, a website that tracks Ethereum’s supply and burn rate, the global ETH supply has grown by nearly 30,000 ETH, equivalent to over $47 million at current prices, in the last 30 days.
This increase in ETH supply is partly attributed to lower network usage and fees, which result from the adoption of layer 2 (L2) scaling solutions.
L2 solutions are protocols that run on top of Ethereum and enable faster and cheaper transactions without compromising security or decentralization.
Some popular L2 solutions include Arbitrum, Optimism, Polygon, and zkSync..
L2 solutions have gained significant user adoption and popularity in recent months, especially in the fields of decentralized finance (DeFi) and non-fungible tokens (NFTs), which are among the main drivers of Ethereum’s network activity and demand.
According to data from L2Beats, the total value locked (TVL) in L2 solutions has reached over $10.5 billion, more than double that of a year ago.
However, lower network activity and fees also mean fewer ETH tokens are burned.
ETH burning is a mechanism introduced by EIP-1559, an upgrade that went live in August 2021.
EIP-1559 changes the way users pay Ethereum fees by introducing a burned base fee and a tip that goes to miners or validators.
The base fee is then adjusted dynamically according to network congestion and demand.
When the network is busy and fees are high, more ETH is burned than issued, creating deflationary pressure on the supply.
When the network is quiet and fees are low, less ETH is burned than issued, creating inflationary pressure on the supply.
EIP-1559, along with the transition to proof-of-stake (PoS) consensus with The Merge, which occurred in December 2021, has significantly reduced Ethereum’s inflation rate by cutting issuance by nearly 90%.
Before The Merge, miners received about 13,000 ETH daily as block rewards. After The Merge, only about 1,700 ETH is issued daily as staking rewards.
However, the recent surge in ETH supply shows that Ethereum’s deflationary narrative is not guaranteed and depends on various factors such as network usage, fees, L2 adoption, and market conditions.
While some analysts and investors view the increase in supply as a temporary phenomenon that will reverse once network activity picks up again, others are concerned about the potential impact of inflation on Ethereum’s price and value proposition.