Ethereum is currently in its longest inflationary period ever, and “blobs” may be the culprit.
Since mid-April, Ethereum’s circulating supply has steadily risen for nearly 72 days, adding nearly 50,000 ETH (about $168.7 million). While ETH holders would typically benefit from scarcity brought about by reduced supply, the opposite is currently true as Ethereum’s base fees are at their lowest point in the past two years. Meanwhile, the number of transactions on the Ethereum mainnet and the activity on layer-two networks have exploded.
Since the merge in September 2022, Ethereum has only experienced long-term inflation a few times, the longest being 40 days shortly after the merge and 30 days at the end of last year. (There are no uniform criteria for Ethereum inflation periods. For the purposes of this article, an inflation period is defined as three consecutive days of increasing total ETH supply, and vice versa.)
ETH is in an inflationary state because the base fees used for burning have decreased significantly. The March DenCun update specially reserved space for each block so that layer-two networks could settle “blobs” transactions without competing with mainnet users.
This, combined with increased data availability through proto-danksharding, has significantly reduced competition for block space. With enough block space for everyone, including layer-two users through blobs, Ethereum’s base fees have plummeted by 90% since DenCun, resulting in more ETH being issued per block than is being burned.
In addition to transitioning from Proof of Work (PoW) to Proof of Stake (PoS), the merge also allows Ethereum to be in a deflationary state on a per-block basis. The Ethereum base fees that users pay used to be part of the block rewards that miners received for discovering blocks by consuming electricity.
However, with no electricity costs post-merge, the total block rewards will far exceed expenses. This could distort the supply distribution of the currency in the long run, with validators ultimately accumulating nearly pure-profit ETH.
To make the experience fairer for ordinary users, developers have chosen to burn the base fees. Validators receive priority fees, reduced block rewards, and additional MEV profits if activated.
Currently, the reward for each Ethereum block is only 2 ETH (about $6,800), with fees contributing less than 2.5%. In contrast, Bitcoin’s Proof of Work pays nearly 3.3 BTC (about $200,000) per block, despite significantly higher costs.
It should be noted that since the merge, Ethereum has burned a large amount of supply, although most of it was before the appearance of blobs. Overall, 1.71 million ETH ($58 billion) has been burned, 1.36 million ETH ($44.6 billion) has been issued, resulting in a decrease in supply of 346,000 ETH ($11.7 billion).
This makes Ethereum’s annual deflation rate 0.161%.
If Ethereum were still running Proof of Work, the supply would increase by 6.76 million ETH ($228.7 billion) annually, with an inflation rate of over 3%. Therefore, despite the recent inflationary trend, holders are still in a much better position, albeit slowly and slightly diluted.
