Ether to become net-inflationary over 2 years after PoS Merge

The post-Merge vision for ETH as an ‘ultrasound’, deflationary asset got off to a slow start, briefly punctuated by panic surrounding the collapse of FTX.

With the Merge coming in the depths of a bear market, low network activity saw insufficient ETH burned as the network’s “base” gas fee compared to newly minted tokens.

As activity picked up, however, the ETH supply eventually dropped into deflationary territory by mid-January 2023, where it’s remained ever since.

An overall downtrend saw post-Merge supply hit a record low of over 450,000 ETH, worth almost $1.6 billion at the time (or around $1.2 billion today), according to data from CoinMarketCap.

The turnaround in early April last year came off the back of changes to the way L2 networks settle their transactions on Ethereum “mainnet.” The change came as part of the Dencun upgrade, in EIP-4844 which introduced the concept of “blobs.”

Rather than posting a permanent record of all L2 transactions as gas-hungry calldata, blobs allow for the temporary storage of the details, which expire after 18 days. This makes fees on L2s far cheaper than on mainnet, and is one of the scaling-focused features dubbed the “Surge.”

However, lower gas fees means less ETH burned, and a return to an inflationary environment for crypto’s second biggest asset.

While the switch back to inflation marks a milestone in post-Merge “ETH-enomics,” it’s important to remember the improvement compared to the previous, proof-of-work (PoW) system.

In addition to the drop of over 99.9% in energy consumption gained by switching to PoS, simulation of the continuity of PoW shows an average inflation of 3.3% per year, which would have led to an additional 9.5 million of ETH supply since the Merge (over $25 billion at the time of writing).

ETH to keep on surging

Further scaling improvements continue to come for Ethereum, with an increased gas limit being adopted by the majority of validators today.