Ethereum is currently experiencing its longest inflationary period, which is being attributed to the increase in “blobs.” Inflation has been observed in the circulating supply of Ether for almost 72 consecutive days, adding nearly 50,000 ETH (equivalent to $168.7 million) since mid-April. This decrease in scarcity is reflected in Ethereum’s base fee, which is currently at one of its lowest points in the past two years. Despite the increase in transactions on the Ethereum mainnet and the explosion of layer-2 activity, ETH holders are not benefiting from net supply burns due to the decreased scarcity.
The inflationary period of Ether since the Merge in September 2022 has been relatively short compared to the current 72-day stretch. The criteria for defining an inflationary period is based on the total increase in ETH supply for at least three consecutive days. The merge to proof of stake allowed Ethereum to become deflationary on a per-block basis, as base fees are burned instead of being rewarded to miners. This change, combined with the increase in layer-2 activity and decreased competition for block space, has led to a decrease in base fees and an increase in ETH issuance.
The Dencun update in March created space in every block for layer-2 networks to settle blobs of transactions without competing with mainnet users. This, along with improved data availability through proto-danksharding, has reduced competition for block space and led to a 90% nosedive in Ethereum base fees since the update. As a result, more ETH is being issued than can be burned, contributing to the current inflationary period. Validators in the Ethereum network now receive a mix of priority fees, reduced block rewards, and optional additional MEV yield, ensuring a fair distribution of rewards.
Despite the recent inflationary trend, Ethereum has still burned a significant amount of supply since the Merge. A total of 1.71 million ETH (equivalent to $5.8 billion) has been burned, while 1.36 million ETH ($4.46 billion) has been issued, resulting in a supply reduction of 346,000 ETH ($1.17 billion). This puts ETH deflationary by 0.161% per year, compared to the more than 3% annual inflation that would have occurred if Ethereum were still running on proof of work. ETH holders are still benefiting from the decrease in inflation, albeit at a slow and slight rate.
In conclusion, Ethereum’s current inflationary period can be attributed to the increase in blobs and the decrease in base fees due to the rise in layer-2 activity. Despite this, the overall deflationary trend of ETH since the Merge has been beneficial for holders. The fair distribution of rewards to validators and the burning of base fees contribute to a more stable and sustainable supply of ETH. As Ethereum continues to evolve and adapt, its deflationary mechanisms and commitment to fairness for all users will ensure its long-term viability and success in the decentralized finance space.
