Since the upgrade of The Merge on September 15, 2022, the supply of Ether (ETH), the staking and network fuel of Ethereum, has been continuously fluctuating, and recent data shows that the ETH supply has rebounded to the highest level since last January. This change has led the market to start focusing on whether Ethereum's positioning as an "Ultrasound Money" remains stable, especially after the Dencun upgrade, when the ETH supply began to show an inflationary trend.
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ToggleETH supply rebounds, back to pre-The Merge levels
According to data from Ultrasound.money, as of now, the total ETH supply has reached 120,521,608 ETH, 569 ETH more than the supply on the day of The Merge.
Does the Dencun upgrade lead to ETH supply inflation? Blobs' implications
Presto Research analyst Jaehyun Ha stated that the increase in ETH supply is related to the Dencun upgrade in March 2024, which may affect Ethereum's status as an "Ultrasound Money".
Before the Dencun upgrade, Ethereum users had to pay a transaction fee (gas fee) when making transactions, a portion of which would be burned, effectively reducing the supply of ETH. However, the Dencun upgrade introduced blob transactions, specifically designed to handle large data transactions on Layer 2 (L2) networks, using a separate fee model called "blob gas" instead of the traditional gas fee.
Ha points out that this has led to a decrease in the proportion of transaction fees being burned, meaning that the ETH supply is no longer as constrained by the increase in transaction activity as it was in the past. "Even if the overall network transaction volume remains high or even grows, the burning mechanism that previously suppressed the expansion of the ETH supply has become less pronounced."
(The Dilemma and Future Development of Ethereum Layer2: Data Analysis Reveals Success and Challenges)
Factors Affecting ETH Supply? L2 and On-Chain Activity Shifting to Other Chains
After the Merge upgrade in 2022, the ETH supply had been continuously declining, reaching its lowest point in April 2024 at around 120,064,500 ETH. However, after the Dencun upgrade, the supply has started to steadily increase and has recently surpassed 120.5 M.
Byoungjoon Kim, a researcher at DeSpread Research, also believes that the Dencun upgrade is a major factor in ETH inflation. He points out that due to the recent meme coin craze and the growth of Layer 2 solutions, many users and liquidity have migrated to the Solana ecosystem, which may further impact the supply-demand balance of Ethereum.
Nevertheless, Ha believes that the current increase in ETH supply will not immediately impact the Ethereum network, as network activity remains strong. However, he also warns that the "ultrasound money" narrative may be challenged, especially as the upcoming Pectra upgrade may further increase the target and limit for blob transactions, further driving ETH supply inflation.
Impact of Supply Increase on PoS Security
In addition to affecting the status of ETH as an "ultrasound money", Kim also points out that if the ETH supply continues to rise, it may impact the network security of Ethereum under the Proof-of-Stake (PoS) mechanism. He states: "The price of ETH is directly related to the network security, and if the supply increase leads to a price decline, it will affect the validator rewards in the PoS mechanism, thereby impacting the overall network security."
Ethereum Upgrades and Ecosystem Changes: Where is the Future Heading?
In addition to the changes in ETH supply, the Ethereum community has also recently faced several major decisions.
1. Increase in Ethereum Gas Limit
On Tuesday, the Ethereum community reached a consensus to increase the Gas Limit from 30M to 31M, the first adjustment since 2021. This change aims to improve the scalability of the network and increase the efficiency of transaction processing.
2. Controversy in Ethereum Foundation Leadership
On the other hand, the governance issues of the Ethereum Foundation have also sparked heated discussions. Recently, an informal vote proposed to appoint former Ethereum researcher Danny Ryan to replace the current Executive Director, Aya Miyaguchi, but Ethereum co-founder Vitalik Buterin has publicly opposed this change.
As the governance dispute escalates, some core developers have chosen to leave the community, including Eric Conner, who has long been involved in Ethereum development. It remains to be seen whether this will impact the technical development of Ethereum.
Does ETH's Long-Term Value Depend on Utility?
Ethereum is indeed the most widely used smart contract platform globally, with a large developer community and a rich application ecosystem (such as DeFi, Non-Fungible Tokens, and Layer 2). In the long run, as more users enter Ethereum, especially the adoption of traditional finance, enterprise-level applications, and emerging markets, the demand for ETH should increase, driving up its price.
However, market prices are not determined solely by technology or utility, but are also influenced by investor sentiment, liquidity, macroeconomic conditions, and competitive landscape. Even if Ethereum maintains a technological lead, if the growth in demand for ETH fails to keep up with the increase in supply (such as the ETH supply inflation after the Dencun upgrade), the price may still face pressure in the short term.
ETH Spot ETF Approved, Why Didn't the Price Surge?
The approval of Ethereum's spot ETF is indeed a major breakthrough for the market, signaling that traditional financial capital can more easily enter the ETH market. However, compared to the significant price increase after the launch of the BTC spot ETF, the response of ETH seems relatively mild, which may be due to the following reasons:
(1) ETF Already Priced in by the Market
The market often reacts in advance to major positive news, and the ETH spot ETF had already experienced a wave of speculation before its official approval. Some investors may have chosen to "sell the news" after the ETF was approved, preventing the price from surging significantly in the short term.
(2) ETH Demand Not Yet Accepted by Institutional Investors
Compared to BTC's clear narrative as "digital gold", the investment positioning of ETH is more complex. ETH is both a settlement layer asset and a staking yield asset, and is also involved in the development of Layer 2 networks. Many institutional investors are still evaluating the long-term value of ETH, so the capital inflow after the ETF launch may not be as immediate as it was for BTC.
Why is ETH's Gain Lagging Behind BTC and SOL?
(1) BTC Remains the Primary Choice for Institutional Investors
Even though the ETH spot ETF has been approved, BTC is still the preferred choice for institutional investors, as it is seen as "digital gold" and a more suitable hedge asset. While ETH is more innovative in its ecosystem development, it still occupies a secondary position in institutional capital allocation, which has resulted in a slower pace of capital inflow compared to BTC.
(2) Solana's performance driven by meme coins and ecosystem growth
Solana's recent surge is closely related to the explosion of its ecosystem, especially the meme coin craze that has driven a surge in trading volume, leading to increased demand for SOL. In addition, Solana's competitive advantages in low fees and high efficiency have made it the preferred public chain for an increasing number of new users, while ETH is still constrained by the development progress of Layer 2 solutions and is unlikely to see a significant advantage in the short term.
(3) ETH lacks short-term catalysts
Compared to the supply reduction effect of BTC's halving, and the market's enthusiasm for SOL due to ecosystem growth, ETH currently lacks clear short-term catalysts. Although the approval of the spot ETF is positive, it will not immediately change the supply and demand situation of ETH, and the market is still waiting for the next real event that can drive the rise of ETH, such as:
- Will the Pectra upgrade improve the burning mechanism and re-strengthen the contraction of ETH supply?
- Can Layer 2 truly reflect the value of ETH? Although the development of L2 has made transactions cheaper, it has also led to some transaction demand no longer burning ETH, which has limited support for the ETH price.
ETH still has potential, but the market is waiting for confirmation
The key events that may help ETH regain market favor in the future include:
- Institutional capital starts to enter the ETH spot ETF: If the inflow data of the ETF shows stable growth, the ETH price may start to catch up.
- Layer 2 ecosystem matures, ETH demand rebounds: When more DeFi applications and enterprise-level applications choose Ethereum as the primary settlement layer, the demand for ETH will further increase.
- Improvement of ETH supply mechanism: If Pectra or future upgrades can make the burning mechanism effective again, the reduction in ETH supply may bring new price momentum.
However, the fact is that although the overall capital inflow of the ETH ETF is still net positive, it has not brought about a rise in the ETH price, and some analyses even believe that institutions' positions in the ETF are only for arbitrage with futures positions.
In addition, L2 has continued to grow, but has not shown a proportional relationship with the ETH price, and the current assessment of the Pectra upgrade is that the side effects of blobs may be exacerbated.
Although Ethereum still has a huge pool of capital and a development community, most of the popular on-chain activities have gradually spread from Ethereum to other chains, and Ethereum may face a common challenge of blockchain applications - what applications can bring a large audience? Are they prediction markets or ENS domain names? Can the value of these applications support the token economy that Ethereum promises?
Risk Warning
Cryptocurrency investment is highly risky, and its price may fluctuate violently, and you may lose your entire principal. Please carefully evaluate the risks.
