Ethereum Inflation Problem: How it Affects ETH Price

With the transition to PoS, there has been a widespread expectation of a bright future for ETH. This was based on supply scarcity. However, the prolonged bear markets soon put the altcoin king to a significant test.

Ethereum Coin Inflation

The supply dynamics in Ethereum are being disrupted amidst bear markets. Defi, meme coins, and the lack of interest in other areas have reduced activity. The decrease in network activity has become the beginning of a difficult test for ETH.

Depending on the time period you look at, you will get different results regarding Ethereum inflation. There are various periods in which you can describe Ethereum as deflationary or inflationary. For example, in a seven-day model, Ethereum becomes scarcer, while on an annual basis, the opposite may be observed.

Ethereum Burning Mechanism

In August 2021, Ethereum introduced a fee burning mechanism. This is called EIP-1559 and has been in practice ever since. If transaction fees increase and more transactions are made, more ETH is burned. However, in the opposite scenario, where transaction fees decrease due to network congestion and a decrease in transaction volume, it means less burning.

With the completion of the PoS transition last year, everyone started saying that the supply would constantly decrease thanks to EIP-1559.

ETH Inflation Problem

Transaction fees for sending ETH on the protocol are currently around $0.28. According to Etherscan data, a transaction on Uniswap currently costs $2.76. This is significantly lower compared to $4.17 at the beginning of September.

Chris Martin, the research director at Amberdata, said the following about the reasons for the decrease in fees:

“The Ethereum Foundation’s focus on scalability with Ethereum 2.0 has had tremendous benefits for the network, making it cheaper and more secure.”

However, with such low fees and low transaction volume, how can ETH escape inflation? The total burning remaining below the stake reward indicates that inflation can continue to be positive. Julio Barragan, the director of education at Blocknative, believes this is temporary and naturally assumes that the decrease in inflation will continue.

In terms of supply, the only certainty is uncertainty. According to Barragan, we will only see what will happen by experiencing it.

“Predicting the future of Ethereum transaction fees is further complicated by the gradual acceptance of ERC-4337.”

Account abstraction and the widespread use of L2, among other factors, suggest that network revenue could become more variable.

While ETH inflation is +0.34% in a seven-day period, it is still at -0.2% in a 380-day period. In the monthly period, inflation is net positive.

Disclaimer: The information in this article does not constitute investment advice. Investors should be aware of the high volatility and associated risks of cryptocurrencies and should conduct their own research.

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