Ethereum (ETH) Supply May Reach Pre-Merge Supply Within Next Few Weeks

The Ethereum (ETH) network has undergone significant transformations since the merge in September 2022, transitioning from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism.

This monumental shift not only reshaped Ethereum’s energy efficiency but also introduced new dynamics to its supply issuance, ultimately aiming to achieve deflationary supply pressures under optimal network demand. However, recent trends reveal a fascinating divergence, with Ethereum’s supply nearing its pre-merge levels after a prolonged period of inflationary growth.

According to prominent crypto analyst Benjamin Cowen, the total supply of ETH is increasing at approximately 45,000 ETH per month and is now just 32,000 ETH away from its pre-merge level. Cowen highlights that demand, while slightly improving since mid-2024, has been insufficient to counteract inflationary pressures over the past 10 months.

Supply Trends Since the Merge

One of the most anticipated outcomes of the Ethereum merge was a drastic reduction in the network’s issuance rate. Under the PoW model, Ethereum’s annual supply growth was approximately 4.5%. Post-Merge, the transition to PoS reduced issuance by roughly 90%, to an estimated 0.4% annualized rate. With Ethereum’s fee-burning mechanism introduced by EIP-1559, these changes were expected to create deflationary pressure on ETH supply during periods of high demand and elevated transaction fees.

However, as Cowen noted, the last 10 months have been characterized by low network demand, resulting in a steady increase in ETH supply. Despite the Merge’s structural changes, the expected deflationary benefits have yet to materialize.

Factors Driving Supply Growth

The primary driver behind Ethereum’s inflationary supply trend is low network demand. The deflationary mechanism activated by EIP-1559 burns a portion of transaction fees, effectively reducing ETH supply. This burning mechanism is sensitive to network activity, with deflationary pressures intensifying during high gas fees.

Unfortunately, network demand has remained subdued throughout much of 2024. While decentralized finance (DeFi), non-fungible tokens (NFTs), and other blockchain use cases continue to grow, transaction volumes and gas fees have not been high enough to offset new issuance.

This has resulted in a prolonged period of supply growth, with the total ETH supply steadily increasing since early 2024.

The Impact of Macroeconomic Factors

Ethereum’s supply dynamics cannot be separated from broader macroeconomic trends. The Federal Reserve’s aggressive interest rate hikes throughout 2023 and early 2024 exerted significant downward pressure on risk assets, including cryptocurrencies. As liquidity tightened, speculative demand for ETH declined, contributing to the network’s low transaction volumes.

However, a subtle shift occurred in mid-2024 when central banks, including the Federal Reserve, began signaling a pivot toward rate cuts. This easy monetary policy reignited some demand for ETH, albeit insufficient to sustain prolonged deflationary trends.

July 2024 marked an inflection point in Ethereum’s supply trajectory, as analyst Benjamin Cowen predicted that the ETH supply could return to pre-merge levels by December 2024 if inflationary pressures persisted. While demand increased slightly in response to rate cuts, it was not enough to reverse the overall trend. Now, just weeks into 2025, Ethereum’s supply is poised to reach its pre-merge levels—a milestone few had anticipated so soon after the network’s upgrade.

Implications for Ethereum’s Future

The approach of Ethereum’s supply to its pre-merge levels raises critical questions about the network’s long-term economic sustainability and its attractiveness as a deflationary asset. Key implications include:

Demand-Driven Sustainability: Ethereum’s deflationary model is contingent on robust and consistent network activity. Without significant demand from DeFi, NFTs, gaming, and other sectors, the network’s supply may remain inflationary in the short to medium term.

Investor Perception: One of Ethereum’s primary value propositions post-Merge has been its potential as a deflationary asset, often likened to “ultrasound money.” Prolonged inflationary trends could challenge this narrative, potentially impacting investor confidence.

The Role of Layer-2 Solutions: The rise of layer-2 scaling solutions, such as Arbitrum and Optimism, has helped alleviate congestion on Ethereum’s mainnet. While this reduces gas fees and improves user experience, it also diminishes the burning effect of EIP-1559 on the mainnet, contributing to the network’s inflationary trend.

Future Catalysts: Despite the current supply dynamics, several upcoming catalysts could reignite demand for Ethereum. These include advancements in Ethereum’s roadmap (e.g., proto-dank sharding), increased adoption of decentralized applications, and potential macroeconomic tailwinds from continued monetary easing.

Ethereum’s approach to pre-merge supply levels is a stark reminder of the network’s dependence on demand to achieve its deflationary ambitions. While the merge marked a monumental step forward for Ethereum’s sustainability and security, it has not been a panacea for its economic challenges.

To maintain its competitive edge and fulfill its vision of becoming the backbone of Web3, Ethereum must foster greater adoption and utility across its ecosystem. Whether through scaling innovations, partnerships, or enhanced user experiences, the path forward requires sustained effort from developers, investors, and the broader Ethereum community.

The lessons from Ethereum’s recent supply dynamics offer valuable insights into the intricate interplay between technology, economics, and human behavior in the evolving world of blockchain.

Disclaimer: This content is meant to inform and should not be considered financial advice. The views expressed in this article may include the author’s personal opinions and do not represent Times Tabloid’s opinion. Readers are urged to do in-depth research before making any investment decisions. Any action taken by the reader is strictly at their own risk. Times Tabloid is not responsible for any financial losses.

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