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According to the latest Binance Research report, the issuance rate of Ethereum (ETH) continued to rise in September 2024, raising concerns about the digital asset’s claim to “ultrasound money.”
Ethereum’s issuance rate continues to rise
In October 2024 Monthly Market Insights a reportBinance Research highlighted that the ETH issuance rate continued to climb in September, moving away from its previous deflationary situation.
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The second largest digital asset by reported market capitalization had a 30-day annual inflation rate of around 0.74%, a level not observed in the past two years. The sharp rise in ETH supply inflation has called into question the status of “ultrasound money.”
Interestingly, the term “ultrasonic money” is inspired by the “sound money” narrative of Bitcoin (BTC). While the maximum supply of BTC is 21 million, the supply of ETH could become deflationary, theoretically increasing scarcity and protecting it from the erosion of purchasing power caused by inflation.
Ethereum’s high issuance rate can be attributed to several factors, including lower on-chain mainnet activity, which leads to lower transaction fees, and thus lower Ethereum burn rates.
In 2021, Ethereum’s core developers implemented EIP-1559, which introduced a fee burning mechanism aimed at reducing the circulating supply of ETH, thus creating deflationary pressure on the token.
However, as mainnet activity decreases, the amount of Ethereum being burned lags behind the rate of Ethereum issuance, leading to a net inflationary trend.
Notably, September 2024 saw one of the lowest ETH burn rates since the highly anticipated to merge It happened, when Ethereum moved from a Proof of Work (PoW) mechanism to a Proof of Stake (PoS) consensus mechanism.
Can Ethereum Layer 2 solutions be blamed for the low Ethereum burn rate?
The report points to March 2024 as the starting point for Ethereum’s inflationary trend, after the implementation of EIP-4844 or Dincon Upgrading, resulting in lower transaction costs on Layer 2 measurement platforms such as Optimism (OP), Arbitrum (ARB), Base, and Polygon (MATIC). The report adds:
As L2 network activity unwinds throughout the year – further influenced by broader market conditions – transaction fees, and thus fees burned on Ethereum, have declined, with September recording one of the lowest levels since the consolidation. This has prevented ETH supply from falling to remain deflationary, resulting in the net positive daily supply changes we are seeing now.
Recent trends support the above assertion, as network activity on Layer 2 solutions is growing across various metrics. For example, A a report In July 2024, note that daily active addresses and transaction volume on Polygon increased significantly.
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Likewise, decentralized finance (DeFi) activity on Arbitrum increased earlier this year when decentralized exchange (DEX) Uniswap Transgression $150 billion of the total swap volume on the network.
last a report It found that more than 48% of digital assets linked from the Ethereum network end up in Arbitrum, indicating high confidence among users in the strong security and reliability of the layer 2 network. Ethereum is trading at $2,385 at press time, up 1.7% over the past 24 hours.
Featured image from Unsplash, charts from Binance Research and Tradingview.com