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Ethereum Supply Concerns: Highest Levels Since December 2023

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Ethereum's deflationary narrative is under scrutiny as recent data reveals its highest quarterly inflation rate since transitioning to Proof of Stake through The Merge in September 2022, as per CoinGecko's latest quarterly web3 report.

Inflationary Trend Emerges

In Q2 2024, Ethereum's supply increased by 120,800 ETH ($421.3 million), surpassing the 107,725 ETH burned by the network's transaction burning mechanism. This resulted in a significant drop of 66.7% in Ethereum's quarterly burn rate, with the network remaining deflationary for only seven days compared to 66 days in Q1.

Impact of Low Gas Fees

The decline in Ethereum's burn rate was driven by historically low gas fees, currently averaging at 3 gwei per transaction, according to Ultra Sound Money. Fees even reached a low of 1.9 gwei last month, the lowest since 2020.

Supply Dynamics

Ethereum's supply now exceeds 120.2 million ETH for the first time since early December, marking a shift towards inflation since early April. The network currently inflates by 50,000 to 60,000 ETH weekly, despite a reduction of nearly 293,000 ETH since The Merge.

Double-Edged Sword

While low transaction fees encourage greater network adoption, they also challenge Ethereum's promise of post-Merge deflation, a draw for many investors since 2022.

Post-Dencun Effect

The network's inflationary phase coincided closely with the Dencun upgrade in March, which drastically reduced Layer 2 transaction costs. This led to substantial fee reductions on top Layer 2 networks, benefiting Ethereum's scalability but impacting its deflationary trajectory.

Conclusion

Ethereum's recent supply dynamics highlight the complexities of balancing transaction efficiency with maintaining deflationary pressure. The network's evolution continues to shape investor sentiment amidst ongoing developments in blockchain technology.