Ethereum's Supply Grows 120,818 Despite 107,725 ETH Burned

In August 2021, Ethereum implemented Ethereum Improvement Proposal (EIP) 1559, which resulted in the destruction of 4.5 million Ethereum tokens worth $15.3 billion. The primary goal of this protocol was to establish Ethereum as a deflationary token by reducing the number of tokens in circulation. However, despite this burn mechanism, the supply of Ethereum continues to grow, creating a deflation dilemma for the network.

The EIP-1559 protocol consumes part of the transaction fees as burn payments, which helps to minimize the supply of ETH. The designers of Ethereum intended for this burn mechanism to offset the existing inflationary feature and promote the scarcity of ETH, potentially enhancing its market price over time. However, the ongoing ETH burn vs staking issue reveals the challenges Ethereum faces in balancing its token supply with increasing staking rewards.

When there were many transactions, the system operated precisely as designers had envisioned. The initial implementation of this approach decreased Ethereum’s supply increase to a point where some individuals began believing the system was deflationary. However, the real scenario turned out to be markedly different from the original setup.

In September 2022, Ethereum transitioned from a proof-of-work to a proof-of-stake consensus algorithm. This shift significantly decreased energy consumption but led to an increased issuance of new ETH because validators received ETH rewards through staking. The ongoing expansion of Ethereum’s supply occurs due to steady growth despite the operation of its burning mechanism. The Ethereum deflation problem is worsening as staking rewards continue to outweigh the burning mechanism, leading to concerns about long-term value.

For the first time after EIP-1559 implementation, the Ethereum network transitioned to an inflationary state during Q2 2024. The staking rewards distributed 228,543 ETH to validators, but validators destroyed only 107,725 ETH in this period. The number of ETH in circulation increased by about 120,818 from supply and demand shifts at that time. This shift happened mostly because staking reward issuance rates exceeded the total amount burned.

Ethereum continues to increase its supply since the program issues staking rewards even though it has successfully destroyed millions of ETH tokens. To maintain its deflationary framework, Ethereum needs adjustments because rewards from staking exceed burning activities, which creates an imbalance in the economic model. Future protocol enhancements or staking reward modifications might be needed to achieve this desired economic model.

The Ethereum price remains highly sensitive to these deflationary and inflationary dynamics, with market trends reflecting the uncertainty surrounding the network’s future. Recent momentum changes from the RSI indicator matched key price rejections that occurred near the $1,630 mark. Price momentum became bullish whenever the currency plunged into oversold levels, and these events supported bullish crossover of MACD signs (“Golden Crosses”) throughout upward price action. Favorable momentum continues to dominate the market due to the recent MACD crossover despite RSI signals showing decreased overbought readings. Ethereum shows temporary resistance to bullish trends, although a strong break of the $1,630 threshold would reduce the risk to either $1,600 or $1,585 levels.

The Ethereum project initially set ambitious goals to reduce supply through EIP-1559 along with burning 4.5 million ETH, but the new staking rewards from the Proof-of-Stake shift have caused this network to become inflationary. The increasing supply threatens to undermine deflationary beliefs about Ethereum since modifications to compensation models and prospective system updates are required for maintaining long-term value preservation.