The Changing Dynamics of Ethereum’s Supply
Ethereum’s token supply has been on an upward trend, reaching levels not seen since before The Merge upgrade in September 2022. Data from ultrasound.money indicates that the current ether supply stands at 120,521,523 ETH, which is approximately 383 ETH higher than it was on the day The Merge took effect. This development, noted by Justin Bram, co-founder and CEO at Astaria, has raised questions about Ethereum’s deflationary nature and long-term value proposition.
Analysts have pointed to last year’s Dencun upgrade as a significant factor behind this inflationary trend. Ethereum had gained a reputation as “ultrasound money,” reflecting its status as a deflationary asset with a superior store-of-value potential compared to bitcoin. However, as Presto Research analyst Jaehyun Ha explained, this perception may now be in jeopardy.
How the Dencun Upgrade Shifted Supply Dynamics
Before the Dencun upgrade, Ethereum users paid transaction fees calculated by multiplying the gas price by the gas amount, with a substantial portion of these fees being burned—effectively reducing the overall ether supply. However, the introduction of Dencun changed the fee structure by integrating blob transactions, a new mechanism designed to process large data payloads more efficiently, particularly for Layer 2 solutions.
Unlike standard Ethereum transactions, blob transactions utilize a separate fee unit called “blob gas,” which does not contribute to the fee-burning process in the same way as traditional transactions. As a result, a significant portion of transaction activity has migrated to blob transactions, leading to a reduction in the amount of ether being removed from circulation.
This shift has implications for Ethereum’s deflationary model. Ha noted that even if overall network activity remains high or increases, the balancing effect that previously constrained ether supply growth has weakened. This explains why the supply of ether, which had been in decline since The Merge, reaching as low as 120,064,500 ETH in April 2024, has now begun to rise steadily following the March 2024 Dencun implementation.
Competing Networks and the Future of Ethereum’s Supply
Another factor influencing Ethereum’s recent trends is the competitive landscape. Byoungjoon Kim, a researcher at DeSpread Research, pointed out that many users and liquidity providers have shifted to the Solana network, which has been experiencing a surge in interest due to the ongoing memecoin rally and the rise of numerous new Layer 2 solutions post-Dencun.
Despite these supply concerns, Ha reassured that, for now, Ethereum has not seen a decline in network activity, meaning that the rising supply is not an immediate issue. However, there is a growing discussion around the sustainability of the ultrasound money narrative. The forthcoming Pectra upgrade, expected in the first half of 2024, plans to include an Ethereum Improvement Proposal (EIP) aimed at increasing both the blob target and the blob gas limit, potentially leading to even greater inflation.
Kim, on the other hand, warned that if ether supply continues to increase unchecked, it could eventually compromise Ethereum’s security under its Proof-of-Stake (PoS) model. Since Ethereum’s security is directly tied to the price of ETH—higher ether prices incentivize staking, which in turn secures the network—a prolonged supply increase without corresponding demand growth could weaken the ecosystem.
Ethereum’s Gas Limit Increase and Governance Challenges
As Ethereum grapples with these economic and structural challenges, the network recently reached a consensus on raising the gas limit for the first time since 2021. The adjustment raises the cap from 30 million gas to 36 million gas per block, enhancing the network’s ability to process transactions and improving scalability.
Meanwhile, internal tensions within the Ethereum Foundation have also been making headlines. A recent unofficial vote from the community indicated support for former Ethereum researcher Danny Ryan as a potential leader, challenging the current executive director, Aya Miyaguchi. However, co-founder Vitalik Buterin dismissed calls for a leadership change, leading to discontent among some core developers. Notably, key Ethereum contributor Eric Conner announced his departure from the community, stating on social media platform X, “I am no longer a dot eth. Perhaps some day those in leadership roles will realign with the community, but for now, I am out.“
The Market Reaction
Despite the ongoing debates surrounding Ethereum’s supply dynamics and governance, the price of ether experienced a slight increase of 1% over the past 24 hours, trading at $2,744. However, over the last seven days, ETH has seen a 12% decline, reflecting broader market uncertainties.
As Ethereum navigates these complex developments, the coming months will be crucial in determining whether the network can maintain its deflationary narrative or if the impact of the Dencun and Pectra upgrades will fundamentally alter its economic model.
