After The Merge and up until three months ago, Ethereum’s supply trended deflationary. Historical data highlights that on May 27, 2023, ultrasound.money pegged Ethereum’s inflation rate at -0.654% annually. Yet, by September 23, 2023, this rate had risen to 0.270%.

Ethereum’s inflation rate as of September 23, 2023.

Ethereum’s shift towards deflation was driven by two landmark events: the implementation of EIP-1559, known as the London hard fork, and The Merge‘s switch from proof-of-work (PoW) to proof-of-stake (PoS).

After the implementation of EIP-1559, an Ethereum transaction’s base fee now gets “burned” by sending it to a null address. Post-Merge, the rate of issuance declined notably. Had it not been for the transition from PoW, the inflation would have touched a considerable 3.689% per annum.

Data from Dune Analytics and Blockworks Research reveals that while 2023 witnessed a stagnant trend in ETH transactions, L2 platforms such as Arbitrum and Optimism experienced a notable uptick in transfers.

All this in view, there’s been a pronounced lull in daily transactions, with significant lows around mid-year and another as we approached the end of August and early September. In fact, September 10 saw a dip to 866,548 transactions, a fall of 62,852 from the day prior.

Moreover, Ethereum’s network fees have been on a downward trajectory, mirroring the reduced activity. This decline has persisted since May 2023, with September 9 and 10 marking the year’s lowest daily fees.

On the flip side, layer two (L2) networks have experienced heightened activity, leading to a drop in Ethereum blockchain transactions. This dynamic has resulted in fewer base burns, tempering the deflationary pressure on issuance.

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