It appears that Ethereum might be losing its “deflation dream” after seeing its longest inflationary spell since transitioning to PoS model.
Ethereum (ETH) might be losing its “deflation dream” after seeing its longest inflationary spell since transitioning to a proof-of-stake model (the Merge) in September 2022. Since mid-April, over 112,000 ETH have been added to the overall supply of the world’s second-largest cryptocurrency. That is, according to Ethereum data dashboard ultrasound.money. This has left users scratching their heads about the network’s long-term sustainability.
Ethereum Supply Inflation: EIP-4844’s Impact on Layer 2 Networks Under Scrutiny
So far, accusing fingers are pointing towards the Dencun upgrade that took place in March. As it were, the upgrade introduced nine Ethereum Improvement Proposals (EIPs), most notably the EIP-4844.
This specific EIP, which introduced “blobs”, a mechanism that separates and temporarily stores transaction data, ultimately reducing fees on Ethereum’s layer 2 networks like Arbitrum and Optimism, is believed to be the reason for the inflation.
While EIP-4844 became very successful in the area of reducing transaction fees, that success may have come at a cost. The reality is that, ever since, the total amount of ETH burned on the mainnet has significantly decreased.
Traditionally, Ethereum’s proof-of-stake mechanism burns a portion of transaction fees, effectively reducing the total supply over time. The new data storage method, however, seems to have disrupted this burning mechanism, leading to the current inflationary trend.
Overall Supply
Despite the growing supply trend, it might be important to maintain a positive perspective by looking on the bright side. Notably, the total ETH supply has actually decreased significantly since the Merge. More than 1.5 billion ETH have been burned, with only 1.36 billion added. This means that there has been a net reduction of roughly 345,000 ETH (over $1.1 billion). That is, going by the prices as of publication.
It is not exactly clear what the long-term impact of EIP-4844 on Ethereum’s supply dynamics might be. However, it will be safe to expect that developers may likely implement adjustments to the burning mechanism in subsequent upgrades. That is to see to it that there is a healthy balance between transaction fees and supply control.
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