Since mid-April 2023, Ethereum (ETH) supply has been gradually increasing, the longest inflationary streak since The Merge in 2022.
According to data from ultrasound.money, more than 112,000 ETH have been added to the total supply since April 14. The main reason is believed to be due to the Dencun upgrade deployed on March 13.
The Dencun upgrade introduces nine Ethereum improvement proposals (EIPs), among which EIP-4844, brings “blobs,” a mechanism that allows transaction data to be stored separately and temporarily, contributing to reduced fees gas on Layer 2 networks. In other words, EIP-4844 allows users to “bundle” large amounts of data with transactions without clogging the Ethereum mainnet.
In addition, Dencun also introduced proto-danksharding, a new technique aimed at improving data processing and storage capabilities on the Ethereum blockchain. Proto-danksharding is a stepping stone to the full implementation of sharding on Ethereum, an upgrade designed to significantly increase the scalability of the blockchain by dividing it into smaller segments called “shards.”
While these improvements have significantly reduced the cost of executing transactions on Ethereum layer 2 networks such as Arbitrum and Optimism, the total amount of ETH burned on the mainnet has decreased significantly.
Before the Dencun upgrade, competition for block space on the Ethereum mainnet was high, leading to high gas fees. This has thus encouraged users and developers to move to layer 2 solutions. However, with Dencun reducing gas fees on the mainnet, the incentive to use layer 2 has decreased, leading to a decrease in ETH burned. and contributes to ETH inflation.
Ethereum's supply increased strongly again from April 14. Source: ultrasound.money
Although ETH supply has turned inflationary in recent months, the total ETH supply has still decreased significantly since The Merge. More than 1.5 billion ETH have been burned since September 2022, while 1.36 billion ETH have been created, resulting in a total supply decrease of 345,000 ETH, equivalent to more than $1.1 billion at current prices. in.
A short-term increase in ETH supply could cause selling pressure on the cryptocurrency, some investors may be concerned about inflation reducing the value of ETH. However, in the long term, the Dencun upgrade is expected to help Ethereum become more efficient and scalable, attracting more users and developers. This could lead to higher demand for ETH, offsetting any short-term selling pressure.
More than $1.1 billion USD worth of Ethereum has been burned post-The Merge. Source: ultrasound.money
Keeping a close eye on Dencun's impact on ETH supply is important as inflation continues to be high. Vitalik Buterin, founder of Ethereum, may need to adopt another ETH burning mechanism adjustment to maintain network stability.
