The supply of Ethereum (ETH) has been steadily rising, reaching over 120 million coins, its highest level since early 2023. This increase has sparked discussions across the cryptocurrency community about whether Ethereum’s transition to a Proof-of-Stake (PoS) system. It achieves its desired goal. Objectives. The high supply of ETH, coupled with the declining number of validators, has many wondering if Ethereum can maintain its position as one of the leading cryptocurrencies.
Ethereum Oversupply: Is It a Cause for Concern?
Ethereum’s current total supply of 120,501,906 ETH represents a significant increase in its tokens in circulation, with supply levels approaching pre-merge quantities. Cryptocurrency analytics platform CryptoQuant reported that Ethereum supply has risen sharply in recent months, worrying investors who were anticipating deflationary effects after the network switched from Proof of Work (PoW) to Proof of Stake (PoS).
When Ethereum moved to Proof of Stake (PoS), the goal was to reduce the daily issuance of new coins, going from about 13,000 ETH minted daily to about 1,700 ETH, depending on staking activity. The PoS mechanism aims to make Ethereum more sustainable by significantly reducing the amount of new ETH entering circulation. However, recent data shows that despite these intentions, the supply of Ethereum is steadily increasing, raising doubts about whether Proof of Stake (PoS) is truly delivering on its deflationary promise.
Increased supply amid weak demand
A closer look at Ethereum’s recent supply data reveals that over the past 30 days alone, the circulating supply of Ethereum has increased by over 45,000 ETH. This surge in supply is occurring at a time when Ethereum is struggling to see significant spikes in demand, especially related to staking activities. This increase may indicate that ETH is being released into circulation faster than expected, putting pressure on the cryptocurrency’s price.
One possible explanation for this could be the growing number of untapped ETH. When validators choose to revoke their ETH ownership, the tokens are returned to circulating supply. This sloppy process has contributed to the rise in the total supply of Ethereum. Currently, about 27% of the circulating supply of Ethereum is staking, meaning a significant portion of ETH is still tied up in staking. However, if more validators decide to void ownership of their tokens, this percentage will decrease, increasing the total supply even further.
Refusal to participate with the auditor
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 decreased by about 2%, now totaling about 1,057,356. This decline in validator participation indicates a possible loss of interest in ETH, which could further fuel the growing supply issue.
Validators play a crucial role in securing the network by storing their ETH as collateral. As more validators leave the network, there is a risk that fewer coins will be stored, contributing to a less secure network and an increase in ETH circulation. The low number of validators also means that Ethereum’s proof-of-stake mechanism may fail to stimulate enough participation to keep the network running efficiently.
Layer 2 networks that affect the activity of the main network
Ethereum’s supply concerns are exacerbated by the shift in activity from its mainnet to layer 2 networks. Layer 2 solutions like Base gained popularity, resulting in a significant decrease in activity on the Ethereum mainnet. Ethereum’s EIP-1559 upgrade, which introduced the fee burning mechanism, relies on large transaction volumes to effectively reduce the supply of ETH. However, with a lot of activity moving to layer 2 networks, fewer transactions occur on the mainnet, meaning less ETH is burned and more tokens remain in circulation.
For example, L2Beat data shows that Base 312 million transactions were processed in the past 30 days, nearly ten times higher than the 36 million transactions on the Ethereum mainnet. As the Ethereum mainnet becomes less utilized, its ability to burn tokens and reduce supply becomes more limited.
Ethereum performance compared to Bitcoin
The increasing supply of Ethereum has also contributed to its poor performance compared to Bitcoin. the Ethereum/BTC The trading pair recently fell to its lowest level since March 2021, suggesting that Ethereum is struggling to keep up with Bitcoin’s price gains. Bitcoin continues to show upward momentum, while the price of Ethereum has remained stagnant, likely due to inflationary pressure caused by rising supply.
What does this mean for the future of Ethereum?
Ethereum’s supply issues are a clear indication that its Proof of Stake (PoS) model may not be achieving the results it was designed to achieve. If the current trend continues, Ethereum may face further inflationary pressures, which would be a setback for investors hoping for a deflationary regime. Furthermore, the shift to Layer 2 networks and decreased auditor participation raises additional questions about the long-term scalability and security of the network.
For Ethereum to regain its deflationary status, there must be a balance between the supply of Ethereum and the demand for it. The ability of the Ethereum community to address these concerns through network upgrades or protocol changes will be key to the continued success of the platform.
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