Ethereum’s (ETH) supply has been rising steadily, reaching over 120 million coins, its highest level since early 2023. This increase has discussions across the crypto community about whether Ethereum’s transition to a Proof-of-Stake (PoS) system is achieving its intended goals. The rise in ETH’s supply, coupled with a decline in validators, has led many to question if Ethereum can maintain its position as one of the leading cryptocurrencies.
Ethereum’s Supply Surge: A Cause for Concern?
Ethereum’s current total supply of 120,501,906 ETH marks a significant uptick in its circulating tokens, with supply levels nearing pre-Merge amounts. Crypto analytics platform CryptoQuant reported that Ethereum’s supply has climbed sharply in recent months, which is concerning to investors who were expecting deflationary effects following the network’s shift from Proof-of-Work (PoW) to Proof-of-Stake (PoS).
When Ethereum transitioned to PoS, the goal was to reduce the daily issuance of new coins, moving from roughly 13,000 ETH minted daily to about 1,700 ETH, depending on staking activity. The PoS mechanism is meant to make Ethereum more sustainable by drastically reducing the amount of new ETH entering circulation. However, recent data shows that despite these intentions, Ethereum’s supply has been steadily climbing, raising doubts about whether PoS is truly fulfilling its deflationary promise.
Increased Supply Amid Weakening Demand
A closer look at Ethereum’s recent supply data reveals that, over the last 30 days alone, Ethereum’s circulating supply has grown by more than 45,000 ETH. This rise in supply is happening at a time when Ethereum is struggling to see significant demand spikes, particularly in relation to staking activities. This surge could suggest that ETH is being released into circulation faster than expected, putting pressure on the price of the cryptocurrency.
One potential explanation for this could be the growing number of unstaked ETH. When validators choose to unstake their ETH, the tokens are returned to the circulating supply. This unstaking process has contributed to Ethereum’s rising total supply. At the moment, around 27% of Ethereum’s circulating supply is staked, meaning a significant portion of ETH is still tied up in staking. However, if more validators decide to unstake their tokens, this percentage will decrease, increasing the overall supply even further.
Validator Participation Declines
Another worrying trend for Ethereum is the decline in the number of active validators. In the past three months, the number of validators on the Ethereum network has dropped by about 2%, now totaling around 1,057,356. This reduction in validator participation signals a possible loss of interest in staking ETH, which could further fuel the growing supply problem.
Validators play a crucial role in securing the network by staking their ETH as collateral. As more validators leave the network, there is a risk that fewer coins will be staked, contributing to a less secure network and an increase in circulating ETH. A reduced validator count also means that Ethereum’s PoS mechanism could be failing to incentivize enough participation to keep the network running efficiently.
Layer 2 Networks Impacting Mainnet Activity
Ethereum’s supply concerns are compounded by a shift in activity from its mainnet to Layer 2 networks. Layer 2 solutions like Base have gained popularity, leading to a significant decline in activity on Ethereum’s mainnet. Ethereum’s EIP-1559 upgrade, which introduced a fee-burning mechanism, relies on high transaction volumes to effectively reduce ETH’s supply. However, with much of the activity moving to Layer 2 networks, fewer transactions are occurring on the mainnet, which means less ETH is being burned and more tokens remain in circulation.
For example, L2Beat data shows that Base processed 312 million transactions over the last 30 days, nearly ten times higher than the 36 million transactions on Ethereum’s mainnet. As Ethereum’s mainnet becomes less utilized, its ability to burn tokens and decrease supply is further limited.
Ethereum’s Performance Compared to Bitcoin
Ethereum’s increasing supply has also contributed to its underperformance relative to Bitcoin. The ETH/BTC trading pair recently dropped to its lowest level since March 2021, signaling that Ethereum is struggling to keep up with Bitcoin’s price gains. Bitcoin continues to show upward momentum, while Ethereum’s price has stagnated, likely due to the inflationary pressure caused by the rising supply.
What Does This Mean for Ethereum’s Future?
Ethereum’s supply issues are a clear indication that its PoS model may not be achieving the results it was designed to deliver. If the current trend continues, Ethereum could face more inflationary pressure, which would be a setback for investors hoping for a deflationary system. Furthermore, the shift to Layer 2 networks and the decline in validator participation raise additional questions about the network’s long-term scalability and security.
For Ethereum to regain its deflationary status, there needs to be a balance between the supply of ETH and its demand. Whether the Ethereum community can address these concerns through network upgrades or protocol changes will be key to the platform’s continued success.
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