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Diminished Activity, L2 Migration Push Ethereum to Turn Inflationary

Diminished Activity, L2 Migration Push Ethereum to Turn Inflationary

Recently, Ethereum has seen a shift towards inflation, sparked by a dip in network activity and onchain fees. Data reveals that, with decreased activity and lower fees, Ethereum’s inflation rate stands at 0.270%. The decline in overall activity and people transitioning to layer two (L2) networks has notably curtailed base fee burning.

From Deflation to Inflation: Ethereum’s Issuance Rate Changes Course

After The Merge and up until three months ago, Ethereum’s supply trended deflationary. Historical data highlights that on May 27, 2023, ultrasound.money pegged Ethereum’s inflation rate at -0.654% annually. Yet, by September 23, 2023, this rate had risen to 0.270%.

Ethereum’s shift towards deflation was driven by two landmark events: the implementation of EIP-1559, known as the London hard fork, and The Merge‘s switch from proof-of-work (PoW) to proof-of-stake (PoS).

After the implementation of EIP-1559, an Ethereum transaction’s base fee now gets “burned” by sending it to a null address. Post-Merge, the rate of issuance declined notably. Had it not been for the transition from PoW, the inflation would have touched a considerable 3.689% per annum.

All this in view, there’s been a pronounced lull in daily transactions, with significant lows around mid-year and another as we approached the end of August and early September. In fact, September 10 saw a dip to 866,548 transactions, a fall of 62,852 from the day prior.

Moreover, Ethereum’s network fees have been on a downward trajectory, mirroring the reduced activity. This decline has persisted since May 2023, with September 9 and 10 marking the year’s lowest daily fees.

On the flip side, layer two (L2) networks have experienced heightened activity, leading to a drop in Ethereum blockchain transactions. This dynamic has resulted in fewer base burns, tempering the deflationary pressure on issuance.

What do you think about Ethereum’s supply rate turning inflationary? Share your thoughts and opinions about this subject in the comments section below.



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