The shift to Proof of Stake (PoS) had sparked widespread optimism about Ethereum’s promising future, driven by the anticipation of supply scarcity. However, the prolonged bear markets quickly posed a substantial challenge to the reigning altcoin.
Ethereum’s Coin Inflation
The supply dynamics within Ethereum are experiencing disruptions during bear markets. Reduced activity in areas such as DeFi and meme coins, along with waning interest in other sectors, has led to a decline in network activity. This decline marks the onset of a challenging period for ETH.
Depending on the specific time frame under consideration, Ethereum’s inflation status varies. Different periods can depict Ethereum as either deflationary or inflationary. For instance, within a seven-day window, Ethereum becomes scarcer, while on an annual basis, the opposite trend may be observed.
Ethereum’s Token-Burning Mechanism
In August 2021, Ethereum implemented a fee-burning mechanism known as EIP-1559, which has been in effect ever since. Under this mechanism, as transaction fees rise and transaction activity increases, more ETH is burned. Conversely, in situations where transaction fees decrease due to network congestion or a drop in transaction volume, the burning rate decreases.
Following the successful transition to Proof of Stake (PoS) last year, there has been widespread anticipation that the supply of Ethereum would steadily decrease thanks to the implementation of EIP-1559.
The Inflation Challenge with ETH
Sending ETH on the protocol currently incurs transaction fees of approximately $0.28. According to data from Etherscan, conducting a transaction on Uniswap now costs $2.76, which is notably lower compared to the $4.17 observed at the start of September.
Chris Martin, the Research Director at Amberdata, provided insights into the factors behind the fee reduction, stating the following:
Yet, in the face of these minimal fees and a decreased transaction volume, the question arises: How can ETH avoid inflation? The fact that total burning remains below the stake reward suggests that inflation may persist in a positive direction. Julio Barragan, the Director of Education at Blocknative, views this as a temporary situation and anticipates that the trend of decreasing inflation will continue.
When it comes to supply, the only certainty lies in uncertainty. According to Barragan, we will only gain insight into what lies ahead by experiencing it firsthand.
Account abstraction and the widespread adoption of Layer 2 solutions, among other factors, indicate that network revenue might exhibit greater variability.
ETH experiences a 0.34% inflation rate over a seven-day timeframe but maintains a -0.2% inflation rate over a 380-day duration. On a monthly basis, inflation remains in the positive territory.