Introduction

Ethereum, as the world’s leading smart contract platform, introduced the burn mechanism through EIP-1559 in an attempt to achieve deflationary goals. However, as of April 13, 2025, research shows that its supply is still increasing at an annual rate of 0.805%, adding 3,477,830.85 ETH, despite burning 4,581,986.52 ETH. This report analyzes this phenomenon from a research perspective, exploring historical context, current dynamics, influencing factors, and future outlook.

Historical Context

The London hard fork introduced EIP-1559, changing the way transaction fees were managed. Previously, all transaction fees were given as rewards to miners; under the new mechanism, the base fee is burned, and the remaining “tips” are distributed to validators (formerly miners). This mechanism aimed to counteract the inflationary effect of new ETH issuance, ultimately making ETH a deflationary asset.

The Merge in September 2022 transitioned Ethereum from PoW to PoS, significantly reducing the issuance rate. Before the Merge, miners received about 13,000 ETH daily; after the Merge, with a staking volume of approximately 14 million ETH, the issuance dropped to around 1,700 ETH per day. This change laid the foundation for deflation, but the actual impact of the burn mechanism relies on network activity and fee levels.

Current Supply Dynamics

Since August 2021, Ethereum (ETH) worth $7.3 billion has been burned. As of April 13, 2025, Ethereum’s circulating supply is approximately 120,690,000 ETH, with an annual growth rate of 0.51%. Since the London hard fork, 4,581,986.52 ETH have been burned, totaling about $7.3 billion (based on historical ETH prices). However, the net supply has increased by 3,477,830.85 ETH, indicating that issuance has exceeded the amount burned.

In comparison to Bitcoin, during the same period (three years and eight months), its annual inflation rate has averaged 1.517%, despite Bitcoin having a fixed supply cap of 21 million, while Ethereum theoretically has an unlimited supply.

Factors Influencing the Burn and Issuance Balance

The following factors impact the balance between burn and issuance:

Network Activity and Transaction Fees:

• The burn rate is directly correlated with transaction volume and fees. High activity periods (such as NFT booms or DeFi surges) can lead to temporary deflation. The 2024 Dencun upgrade, by introducing proto-danksharding, reduced Layer 2 transaction fees and improved user experience, but also decreased the burn rate. For example, Dencun lowered transaction costs on Layer 2 solutions (like Optimism, Arbitrum), indirectly reducing the burn on the main chain.

Issuance Rate:

• Post-merge, the issuance rate is based on staking rewards, with approximately 1,700 ETH issued daily, or around 620,500 ETH annually (assuming stable staking participation). Although this is a significant reduction compared to pre-merge (13,000 ETH/day), the current burn rate still isn’t enough to offset it during low activity periods.

Main Burn Contributors:

Data shows that the primary sources of burn include:

These platforms drive a large number of transactions, but activity levels are influenced by market conditions, such as fluctuations in NFT trends and DeFi usage.

Market Conditions:

• High activity periods can result in temporary deflation, while low activity periods (such as Q2 2024, which saw an increase of 75,301 ETH) lead to inflation. Data from Q2 2024 shows an issuance of 228,543 ETH, a burn of 107,725 ETH, and a net increase of 120,818 ETH.

Analysis of Continued Inflationary Trends

The future dynamics of Ethereum’s supply may be influenced by the following factors:

The “Expectation Trap” in Technological Evolution

The limitations of the EIP-1559 mechanism design:

Although the burn mechanism creates a new paradigm of value capture by burning the base fees, its effectiveness is constrained by the non-linear fluctuations of network activity. Data shows that after the Dencun upgrade in 2024, Layer 2 transactions accounted for over 83%, resulting in a 72% drop in daily Gas fee income on the mainnet.

Implementation Challenges of Sharding Technology

The Pectra sharding upgrade, originally planned for Q1 2025, has been delayed due to issues with ZK-Rollup compatibility. As a result, transactions per second (TPS) remain in the 15-45 range, which is insufficient to support high-frequency trading scenarios.

“Value Drain” in Ecological Competition

Multi-Chain Ecosystem and Value Divergence:

Solana, with its 9,000 TPS and $0.0001 transaction cost, captured 38% of the public chain market share in 2024. Its daily active users reached 2 million, which is 5.6 times the daily active users of Ethereum’s mainnet.

Structural Decline of DeFi and NFTs:

Ethereum’s on-chain NFT sales have fallen from their peak of $1.23 billion per month in 2023 to just $125 million in 2025. Additionally, after Uniswap v4 fully transitioned to Layer 2, the mainnet’s DEX trading volume has fallen to less than 9%. The situation is even more dire in the RWA (Real World Asset) sector, where institutions like BlackRock have opted to issue tokenized funds on Polygon, causing Ethereum to miss a trillion-dollar market entry.

Reflexivity Paradox in Economic Models

Imbalance in Staking Mechanism Incentives

The 3.2% staking yield designed after the Merge has lost its attractiveness in the macroeconomic environment, where the Federal Reserve’s benchmark interest rate is 5.25%. As a result, the number of validator nodes has decreased from 3.495 million to 3.4 million, and the staking rate has dropped to 27%.

Asymmetric Effect of the Burn Mechanism

Data modeling indicates that for Ethereum to be deflationary, the burn rate needs to exceed the issuance rate (approximately 1,600 ETH per day). However, during market downturns, the number of active network addresses drops to 360,000 per day, and the daily burn rate can only sustain about 800 ETH.

Structural Suppression of the Regulatory Environment

The Shadow of Securities Classification

The SEC has classified 75% of ERC-20 tokens as securities, and prohibited ETH ETFs from participating in staking, directly causing institutional inflows to decrease by 22% year-on-year. In contrast, Bitcoin, with its clear positioning as “digital gold,” attracted $30 billion in ETF inflows, widening the regulatory arbitrage gap and causing the ETH/BTC exchange rate to fall to a historical low of 0.02.

Passing on Compliance Costs

To meet KYC/AML requirements, smart contract gas consumption has increased by 27% due to compliance modifications such as account abstraction, further suppressing network activity.

Conclusion: Ethereum’s Midlife Crisis

Ethereum’s deflationary dilemma is fundamentally a microcosm of the clash between technological idealism and commercial realism. As ETH’s market share remains at a historical low of 17.5%, it reflects not only an imbalance in monetary policy but also the growing pains of the entire industry transitioning from “proof of concept” to “value creation.” The future solution may not lie in a mechanical pursuit of a deflationary model, but in creating a new paradigm that balances efficiency, fairness, and regulatory sustainability. Just as Satoshi Nakamoto did not anticipate the ETF frenzy when creating Bitcoin, Ethereum’s value discovery will require breaking free from existing frameworks and finding a dynamic balance between technological ideals and market realities.

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