UltraSound.Money data reveals that from April to May 2024, the inventory of ETH, the primary coin of the Ethereum Blockchain, has experienced a resurgence.
This shift marks a return to inflation after several months of deflation, indicating a reversal in the trend of ETH supply depletion.
Ethereum Returns to Inflationary State
The resurgence in ETH inventory, as highlighted by UltraSound.Money reflects an inflation rate of 0.32% per year over the last 30 days.
This signifies a continual increase in ETH supply, contrasting the deflationary trend observed since the implementation of “The Merge” or the transition from Proof of Work to Proof of Stake consensus mechanism in September 2022.
The transition to Proof of Stake introduced a new mechanism called ‘burn,’ where a portion of ETH transaction fees earned by validator nodes is removed from circulation to reduce the supply.
As per UltraSound.Money data, ETH supply had decreased significantly with a deflation rate of 0.215% per year since The Merge, demonstrating the effectiveness of the newly implemented mechanism.
However, the recent shift towards inflation is perceived with mixed sentiments. While some view it unfavourably due to concerns about diminishing scarcity, others interpret it positively for the growth of the Ethereum ecosystem.
Is it Good News or Bad News?
The negative perspective revolves around the notion that an increase in ETH supply diminishes its scarcity, potentially affecting the supply-demand dynamics and, consequently, its price.
On the other hand, historical evidence suggests that ETH’s price had already appreciated significantly even when it was inflationary before The Merge, indicating that supply dynamics alone may not determine its value.
Moreover, the current downward movement in ETH prices is attributed more to broader market conditions rather than its inflationary status.
Nevertheless, the positive outlook suggests that the current inflationary phase could foster Ethereum’s ecosystem growth.
The recent inflationary phase is attributed to the reduced burn of ETH, primarily due to recent updates facilitating integration with Layer 2 blockchains. Consequently, lower transaction fees on Ethereum imply fewer ETH being burnt. This translates to a more efficient blockchain network, a positive development for Ethereum’s usability and scalability.
Furthermore, the potential for ETH to revert to a deflationary state exists, contingent upon increasing transaction volumes.
With rising transaction volumes, even with lower fees facilitated by Layer 2 blockchains, the increased demand for transactions could restore the deflationary purpose through more ETH being burnt.
In conclusion, the current inflationary phase is likely temporary and not a cause for concern for ETH holders.
Moreover, it could be beneficial, especially amidst predictions of a Bull Run in 2025, where increased transaction volumes could potentially reinstate deflationary tendencies.
