On-chain analysis of Ether (ETH): ETH inflationary again?

Since September, ETH supply has been on the rise, causing a slight net inflation of 0.2% in October. This phenomenon is largely due to the fact that activity on the Ethereum network is very low at the moment.

Bullish reversal in ETH supply

While The Merge and the transition of the Ethereum network from PoW to PoS (marked in blue on the curve below) were expected to cause ETH supply to fall structurally, the practical results point to imperfections.

Although the trajectory of ETH supply is deflationary if we measure the net change in supply since The Merge, it seems that the ETH inflation rate has been approaching positive values since September and that supply in circulation is up by almost 150,000 ETH.

Figure 1: ETH supply in circulation

Today, we explore the dynamics of ETH supply from The Merge and measure on-chain activity on the Ethereum network to understand the recent rise in the supply of ethers in circulation.

Post-Merge dynamics of ETH supply

As we take a closer look at the components of ETH supply variation, the evolution of net supply variation details the situation clearly. We can then separate the post-Merge dynamics of ETH supply into three distinct periods:

Blue: September 2022 – February 2023 : Supply variations are bullish but minimal, inflation is positive but very low;

Red: March – September 2023: ETH supply enters a phase of increasing deflation, peaking in May with a net change in supply of over – 647,000 ETH ;

Green: Since September 2023: the curve recovers and the supply in circulation increases again, a slight inflation is recorded in September and October, which seems to be slowing down since this week.

Figure 2: Net change in ETH supply

The evolution of the ETH inflation rate corroborates these observations and points to renewed inflationary behavior in ETH supply in October. Whereas the average ETH inflation rate was 4.5% prior to the launch of EIP-1559 (destruction of ETH with each transaction), The Merge brought the rate down to 0.2% in September 2022.

This already remarkable reduction in inflation then turned into rising deflation, which peaked in May 2023 with a negative rate of -8%. Since then, the net inflation rate has gradually approached 0, until recently becoming positive again, as we have shown.

Figure 3: ETH net inflation rate

This phenomenon can be explained by the low on-chain activity on the Ethereum network in recent months, which has reduced the rate of supply destruction without impacting the ETH issuance rate.

On-chain activity on the Ethereum network

As we delve into the measurements of Ethereum network activity, it seems that participants aren’t particularly engaged. Indeed, the number of active addresses has been falling since the peak in May 2021, recording a drop of almost 50% compared to bull market activity levels and a decline of -18% since the Merge.

Figure 4: Active Ethereum addresses

Furthermore, transfer volume in native units (ETH) is also very low, reporting a -70% drop since the Merge. This can be explained by the general apathy and doubt that characterize periods following bear markets, when investors are still rather skittish and don’t dare return to the network.

Figure 5: Transfer volume [ETH]

The current low activity on the Ethereum network is generating less token burn via EIP 1559 without impacting the ETH issuance rate. This causes an increase in ETH supply during periods of low activity and a sharp drop in supply during periods of increased activity.

Summary of this on-chain analysis of Bitcoin

At the end of the day, this week’s data shows that ETH supply has been on the rise since September 2023, recording an increase of almost 150,000 ETH. In response, the inflation rate returned to positive values in October, generating a slight net inflation of 0.2%.

This is largely due to the fact that activity on the Ethereum network is very low at the moment, for a number of reasons:

• Investors are finding it hard to come back from a bear market, and are taking time to regain the confidence needed to boost economic activity on Ethereum ;
• High gas fees scare off some users who prefer to explore other solutions, forsaking the Ethereum network for more attractive environments.

It now remains to be seen whether the recent price action and bullish market push will attract enough interest for on-chain activity to pick up and the inflation rate to return to negative values.