Ethereum hits longest inflationary period since Merge

Ethereum is in the midst of its longest inflationary period so far. And “blobs” could be to blame.

The circulating supply of ether has now risen steadily for almost 72 days in a row, having added nearly 50,000 ETH ($168.7 million) since the middle of April.

ETH holders benefit from any net supply burns due to increased scarcity. However, the opposite is currently happening — ETH is becoming less scarce — now that Ethereum’s base fee is sitting at some of its lowest points in the past two years.

All while the number of Ethereum mainnet transactions has gone up and layer-2 activity has exploded.

ETH has only turned inflationary for an extended period on a handful of occasions since the Merge in September 2022, the longest being a 40-day stretch shortly after the hard fork and a 30-day period late last year.

(There’s no universal standard for when ether is in an inflationary period. For the purposes of this piece, inflationary periods begin when the total ETH supply increases at least three days in a row, and vice versa.)

The purple line shows the total ETH supply since the Merge. Weekly fee spend is in blue, and inflationary periods are marked by the purple bands.

Ether is inflationary because there are far fewer base fees to burn. The Dencun update in March made special room in every block for layer-2 networks to settle “blobs” of transactions without bidding against regular mainnet users.

This, combined with more efficient data availability through proto-danksharding, led to massively reduced competition for block space.

With enough block space for everyone — including layer-2 users via blobs — Ethereum base fees have nosedived 90% since Dencun, making it more likely that every block issues more ETH than can be burned.

On top of ditching proof of work for proof of stake, the Merge allowed ether to turn deflationary on a per-block basis. Ethereum’s base fee, which users pay to transact on the network, had previously gone to miners as part of their reward for spending electricity to discover blocks.

Ethereum’s base fee is way down, layer-2 activity is way up, and mainnet activity is growing slowly

But without any electricity costs post-Merge, the total block reward would have far exceeded overheads. This could’ve skewed the currency’s supply distribution over the long run, with validators eventually accumulating a disproportionate ETH that would be almost pure profit.

To make many things fairer for regular users, developers opted for base fees to be burned. Validators instead receive a mixture of priority fees, reduced block rewards, and if they activate it, additional MEV yield.

The reward per Ethereum block right now is just over 2 ETH ($6,800) with fees contributing less than 2.5%. Proof-of-work Bitcoin is paying almost 3.3 BTC ($200,000) per block, although with significantly higher costs.

To be clear, Ethereum has burned a ton of supply since the Merge, although most of it was pre-blobs. Overall, 1.71 million ETH ($5.8 billion) has been burned and 1.36 million ETH ($4.46 billion) has been issued, resulting in a supply reduction of 346,000 ETH ($1.17 billion).

That puts ETH deflationary by 0.161% per year.

If Ethereum were still running on proof-of-work, the supply would have gone up by 6.76 million ETH ($22.87 billion) — yearly inflation of over 3%.

So, even with its recent inflationary bent, holders are still way better off, albeit slowly and slightly diluted.

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