Ethereum: slight growth in ETH inflation

Since partial fee burns have been introduced on the Ethereum network, ETH’s inflation has reduced dramatically, so that at times it becomes a deflationary currency. 

But it can happen, as has happened recently, that it becomes inflationary again instead. 

The inflation of Ethereum (ETH)

“Inflation” in crypto does not mean price increases, that is, the loss of purchasing power of coins. Instead, it means the eventual increase in the money supply, the so-called circulating supply. 

As can be seen directly on Etherscan, until August 2021 the circulating supply of ETH increased sharply and very steadily. 

In other words, ETH until a couple of years ago was an inflationary currency. 

But then there was a change, due to the introduction of partial fee burns. Suffice it to say that between September 2021 and February 2022 the supply only increased by less than one million units, out of 117 million. 

By the end of 2021, the inflation of Ethereum’s money supply had fallen to 3.5 %, from 4.6 % in 2020. 

But it was from 2022 onward that the effects of partial fee burns were most felt, partly due to the move to Proof-of-Stake. 

In fact, last year ended with ETH’s money supply inflation of only 2%, or less than half of two years earlier. 

The metrics of 2023

The fee burn, however, is not constant because, precisely, it depends on how many fees are paid. 

At the beginning of 2023, the average cost per transaction on the Ethereum blockchain rose above $4, then also rose above $6 in February. In mid-April it also jumped above $15, and in early May it even came close to $30. 

By June it was down again to $4, but in July it was back above $6. 

Starting in September, however, it returned first below $4, and then even lately below $2. 

In the months when the fees paid by users of Ethereum’s blockchain were higher, the burns were also higher, so that ETH for a few months became a deflationary coin. 

2023 opened with a circulating supply of about 120.5 million ETH, and by June it had fallen to just over 120.2 million. That is, the first half of 2023 closed with negative ETH money supply inflation of about -0.25%. The lowest peak of 2023 occurred in August with less than 120.22 million ETH in circulation. 

Thereafter, however, fees fell, and so did partial fee burns. Currently the circulating supply has risen a little since June, settling just below 120.25 million ETH. 

In other words over the past two months there has been a not at all worrisome increase of 0.02%. Acquired inflation since the beginning of the year however remains negative at -0.22%. 

Ethereum’s (ETH) fluctuating inflation

The fluctuating inflation rate of the ETH money supply is due to the fact that there are two phenomena taking place simultaneously. 

The first is the continuous creation of new ETH to remunerate validator nodes that validate transactions, and the second is precisely the partial burn of fees. The rate at which new ETHs are created is essentially invariable, but the burn of fees varies depending on the fees. The fewer fees are paid the less ETH is burned. 

This results in ETH not having a fixed and predictable inflation rate, but a variable one. However, this variability is within a very narrow range, always less than 1 % per year, both positive and negative. 

By contrast, for Bitcoin, for example, the money supply inflation rate is fixed and predictable, and actually halves every four years or so, with halving. 

All this makes Bitcoin’s monetary policy appear to be prefixed and predictable, while Ethereum’s is not. Moreover, Bitcoin’s monetary policy has never been changed, and no one is actually able to change it, while Ethereum’s has already been changed several times, and no one knows for sure whether it will remain identical to the current one in the future. 

ETH is not a deflationary currency

After the introduction of the fee burn, and especially after the move to Proof-of-Work, ETH by some had been called a deflationary currency. 

The numbers above reveal that it is incorrect to call it such, because it is deflationary only at times. Instead, at other times it reverts to inflationary. 

Instead, it is a currency with a variable rate of inflation of the money supply, although generally very limited, and probably negative in the long run. 

Moreover, since there is no certainty that this monetary policy will remain unchanged in the future, it is not even possible to say that ETH has a deflationary nature, while for example BTC does, since it inevitably tends, in the long run, toward deflation. 

As for Ethereum much depends on its usage, because higher usage means higher fees, and therefore higher ETH burns.