Ethereum (ETH) is feeling the effects of accelerating inflation after adding 57,000 new tokens in the past 39 days. Ethereum’s inflation has increased over the past month as the rate of fee burning has slowed.

Ethereum (ETH) has been a deflationary asset for several months, with its supply falling to 120.07 million. After the introduction of EIP-1559, the destruction of base fees once controlled the supply and even caused deflation.

Now, based on the resulting ETH supply, inflation is starting to clearly rise. The impact of the additional ETH tokens is similar to the presence of a large whale every year. After consuming the required base fees, the market must absorb about 700,000 new ETH every 12 months.

Ethereum remains deflationary until Q2 2024, with a deflation rate of negative 0.2%. Since entering inflation, over 250,000 new tokens have been added to the supply. While the market is still able to absorb new assets, this ends ETH’s narrative as ultra-sound money.

In the past 30 days, Ethereum has generated 77,000 new tokens and destroyed 20,000, for a net increase of 57,000. Every week, the network expands by about 15,000 tokens, maintaining a growth trend. The inflation rate is accelerating, rising from 0.53% in the past few months to 0.67%. The current inflation rate is still lower than the mining inflation rate, which will reach 3.99%. Ethereum's inflation rate is still lower than Bitcoin's 0.83%.

L2 adoption and sluggish markets weaken Ethereum’s fee performance

Several factors are driving Ethereum’s inflation rate higher, a trend that is already reflected in the available supply. Current Ethereum token burns eliminate hundreds of tokens from circulation each day, while previous burns destroyed thousands of tokens per day. During deflationary periods, Ethereum was able to destroy 1% of the total supply in 40 days.

The period of lower burn rates in 2022 and 2023 is mainly due to the bear market and general stagnation. Currently, Ethereum shows signs that most traffic has moved to the L2 blockchain, which has achieved long-awaited scalability. On a three-month basis, Ethereum still leads in fees generated. On a weekly basis, Ethereum lags behind TRON and LidoDAO, with fees shared with validators of about $13 million.

Ethereum remains significantly more expensive compared to L2 chains due to its network structure. Ethereum charges fees between $0.90 and $5 for basic activities like DEX swaps, depending on network usage. In a competitive environment, L2 fees can be as low as $0.001 to access most DEX and DeFi activities.

Overall, fees on both Ethereum and L2 payments are down as activity is down by over 50%. After experiencing its first big correction of the year in late June, activity within the Ethereum ecosystem has fallen, with both fees and daily active users down. Median USD fees for some well-known L2 chains have also fallen, indicating reduced activity. Most chains have slowed down and are charging lower fees over the past 30 days.

L2 solutions will slow down Ethereum due to the blob space in each block

There is no consensus on whether Ethereum is better as a high-fee chain or as a chain that allows L2 scaling. In the past, Ethereum founder Vitalik Buterin has expressed a preference for scaling through rollups and other L2 solutions. Others believe that L2 will fragment liquidity and deprive ETH stakers of higher fees.

L2 also creates the blob problem, that is, they package and record transaction states on the Ethereum mainnet. Block builders are new entities in the Ethereum ecosystem, and they change the landscape of L2 scaling.

Some builders prefer to write blocks that favor MEV transactions for fast transactions, while others accept blobs and their higher fees even though this slows down block production. The Ethereum ecosystem has shown that there is no straightforward way to grow and scale, and some metrics may still be in conflict.

The combination of reduced on-chain activity and the L2 migration means Ethereum gas fees have dropped to levels not seen since 2019. Normal fees for transactions in 2021 will be 200 GWei. Over the past month, base fees have typically been 1-2 GWei, with occasional spikes to 20 GWei per day. Even these fees are sometimes ridiculously high compared to L2 chains. Ethereum still has its days with high fees, but it’s not enough to drive the scarcity narrative.