The Ethereum supply continues to grow despite the blockchain burning over $18 billion worth of ETH since implementing EIP-1559 in August 2021. This counterintuitive situation has left investors, analysts, and enthusiasts scratching their heads. How can a network that systematically destroys billions of dollars’ worth of its native token still experience supply expansion? The answer lies in Ethereum Burns $18B Yet, yet the transition to proof-of-stake, and the delicate balance between issuance and destruction mechanisms.
Since the Ethereum merge in September 2022, which transitioned the network from an energy-intensive proof-of-work to an efficient proof-of-stake consensus, the dynamics of ETH creation and destruction have undergone fundamental changes. While the Ethereum Burns $18B Yet introduced by EIP-1559 removes a portion of transaction fees from circulation permanently, the network continues to mint new tokens as staking rewards. This creates a tug-of-war between deflationary and inflationary forces, with the outcome depending heavily on network activity levels.
Ethereum Burns $18B Yet requires examining multiple interconnected factors: staking rewards distribution, network transaction volumes, gas fee fluctuations, and the broader adoption patterns of the Ethereum ecosystem. This comprehensive analysis will dissect each component to reveal the complete picture behind Ethereum’s supply dynamics.
Ethereum’s Burn Mechanism and EIP-1559
The Revolutionary EIP-1559 Upgrade
The implementation of EIP-1559 in August 2021 marked a watershed moment for Ethereum’s economic model. This upgrade fundamentally restructured how transaction fees work on the network, introducing a base fee that gets automatically burned—permanently removed from circulation—with every transaction. The Ethereum Burns $18, yet was designed to create deflationary pressure on the token supply, potentially making Ethereum an ultra-sound money asset that appreciates in scarcity over time.
Before EIP-1559, all transaction fees went directly to miners as rewards. Now, the system splits fees into two components: a base fee that gets burned and an optional priority fee (tip) that goes to validators. This mechanism has successfully removed billions of dollars’ worth of ETH from circulation. According to blockchain analytics, over 4.5 million ETH tokens have been burned since the upgrade’s implementation, representing approximately $18 billion in value at various price points throughout this period.
The burn rate fluctuates significantly based on network activity. During periods of high demand—such as NFT minting frenzies, DeFi protocol launches, or major market movements—the base fee increases, resulting in more ETH being burned per transaction. Conversely, when network activity slows, the burn rate decreases proportionally.
How the Burn Mechanism Actually Works
Every Ethereum transaction includes a base fee calculated algorithmically based on network congestion. When blocks are more than 50% full, the base fee increases; when they’re less than 50% full, it decreases. This dynamic pricing mechanism ensures network stability while simultaneously removing ETH from circulation. The more congested the network becomes, the higher the fees and, consequently, the more ETH gets burned.
Major decentralised applications and protocols contribute disproportionately to the burn rate. Opensea, the leading NFT marketplace, has burned over 230,000 ETH. Uniswap, the decentralised exchange protocol, has contributed similarly massive amounts. USDT transfers, MEV bots, and various DeFi protocols all participate in this deflationary mechanism, each transaction contributing to the overall reduction in circulating supply.
Why Ethereum Supply Keeps Growing Despite Massive Burns
The Issuance Side of the Equation
While the burn mechanism removes ETH from circulation, the network simultaneously creates new tokens through staking rewards. After the merge to proof-of-stake, Ethereum validators earn rewards for proposing blocks and attesting to the validity of other blocks. These rewards represent new ETH entering circulation, creating inflationary pressure that counteracts the deflationary burn mechanism.
Currently, Ethereum’s annual issuance rate hovers around 0.55% to 0.75%, depending on the number of active validators. With over 1 million validators securing the network and approximately 32 million ETH staked (representing about 27% of total supply), the network issues roughly 600,000 to 700,000 new ETH annually as staking rewards. This issuance happens consistently, regardless of network activity levels.
The critical factor determining whether Ethereum supply keeps growing or shrinks is the relationship between burn rate and issuance rate. When network activity is high—generating substantial transaction fees and burns—the burn rate can exceed issuance, making Ethereum deflationary. However, during periods of lower network activity, issuance outpaces burns, causing net supply growth.
The Activity Threshold for Deflation
Ethereum requires an average base fee of approximately 16-18 gwei to achieve net deflation, where the burn rate equals or exceeds the issuance rate. This threshold isn’t arbitrary—it’s the mathematical point where enough ETH gets burned through transaction fees to offset the new ETH created as staking rewards. When network activity generates base fees above this level, Ethereum becomes deflationary; below this threshold, it remains inflationary with growing supply.
The challenge facing Ethereum is maintaining consistently high network activity. During bear markets or periods of reduced crypto enthusiasm, transaction volumes decline significantly. DeFi protocols see reduced trading activity, NFT marketplaces slow down, and general on-chain activity decreases. These periods inevitably push the network into inflationary territory, where Ethereum supply expansion continues despite the burn mechanism operating as designed.
Data from recent months illustrates this phenomenon clearly. During Q4 2024, Ethereum experienced prolonged periods where daily issuance exceeded daily burns by 200-500 ETH, causing gradual net supply growth. While the merge reduced ETH issuance by approximately 90% compared to proof-of-work, the remaining issuance is still sufficient to outpace burns during quieter periods.
Ethereum’s Proof-of-Stake Transition Impact
Comparing Pre-Merge and Post-Merge Economics
The Ethereum merge fundamentally transformed the network’s supply dynamics. Under proof-of-work, miners received approximately 13,000 ETH daily in block rewards, creating significant inflationary pressure—around 4.3% annual inflation. The transition to proof-of-stake reduced this issuance dramatically to roughly 1,700 ETH daily, dropping the inflation rate below 1% annually.
This 90% reduction in issuance represented one of the most significant monetary policy changes in cryptocurrency history. Combined with the EIP-1559 burn mechanism, many analysts predicted Ethereum would become consistently deflationary, with supply shrinking continuously. However, the reality proved more nuanced, as the Ethereum supply keeps growing during periods when the reduced issuance still exceeds the variable burn rate.
The proof-of-stake model also introduced new considerations for token economics. Stakers must lock their ETH to participate in network security, effectively removing millions of tokens from liquid circulation. While these tokens aren’t burned, they’re temporarily illiquid, creating a scarcity effect distinct from actual supply reduction. This staking participation has grown steadily, with over 32 million ETH currently staked.
Staking Rewards Distribution and Its Effects
Validator rewards consist of several components: block proposal rewards, attestation rewards, and sync committee rewards. Additionally, validators receive priority fees (tips) from transactions. The total annual percentage yield for stakers currently ranges from 3.5% to 4.5%, depending on total ETH staked and network activity.
These rewards are funded through new token issuance, creating a predictable inflationary baseline. Unlike the variable burn rate—which fluctuates wildly based on network usage—issuance occurs steadily with each new block. This consistency means that ETH supply expansion happens continuously, while burns happen intermittently based on transaction volumes.
The economic incentive structure encourages more staking participation, which paradoxically increases issuance. As more validators join the network, the total amount of new ETH created increases proportionally, even though individual validator rewards decrease slightly. This creates a self-reinforcing cycle where growing network security comes at the cost of increased supply inflation.
Network Activity and Supply Dynamics
Transaction Volume Impact on Burn Rate
Network activity serves as the primary variable determining whether Ethereum achieves net deflation or continues experiencing supply growth. High-activity periods—characterised by thousands of transactions per block and elevated gas fees—generate substantial burns that can exceed issuance. Major events like significant NFT drops, DeFi protocol launches, or market volatility spikes can temporarily make Ethereum highly deflationary.
For example, during the peak of the 2021 bull market, Ethereum was burning more ETH than it issued, achieving a negative supply growth rate. Some weeks saw net deflation exceeding 1% annualised, effectively making ETH more scarce as demand for block space intensified. This period demonstrated the power of the burn mechanism when network demand reaches sufficient levels.
Conversely, bear market conditions reveal the flip side. When transaction volumes decline, and users become more fee-sensitive, average gas fees drop significantly. Base fees might hover around 3-10 gwei instead of 30-100 gwei, drastically reducing the burn rate. During these periods, Ethereum supply keeps growing steadily as issuance continues unabated while burns decrease to negligible levels.
Layer 2 Solutions Effect on Mainnet Activity
The proliferation of Layer 2 scaling solutions like Arbitrum, Optimism, Base, and zkSync presents both opportunities and challenges for Ethereum’s supply dynamics. These L2 networks process transactions off the main chain, bundling them for periodic settlement on the Ethereum mainnet. While this dramatically reduces costs for users and increases overall Ethereum ecosystem throughput, it also reduces direct mainnet transaction volumes.
Lower mainnet activity means fewer direct burns from individual transactions. However, L2S do conduct regular settlement transactions on mainnet, which can generate substantial fees during high-volume periods. The net effect on Ethereum’s burn rate remains an evolving story as L2 adoption accelerates. Some analysts worry that successful scaling through L2S could permanently reduce mainnet burn rates, making sustained deflation difficult to achieve.
Proto-Danksharding (EIP-4844), implemented in March 2024, further complicates this picture. By introducing blob transactions that provide cheaper data availability for L2S, this upgrade reduced the fees L2S pay for mainnet settlement. While positive for scaling and user costs, it creates additional downward pressure on burn rates, potentially contributing to Ethereum supply expansion during normal market conditions.
The Economics Behind Ethereum’s Supply Model
Token Economics Fundamentals
Ethereum’s supply model now operates as a dynamic equilibrium system rather than a fixed monetary policy. Unlike Bitcoin’s predetermined issuance schedule—which halves every four years until reaching a maximum supply of 21 million BTC—Ethereum’s supply model responds organically to network usage patterns. This flexibility offers advantages and disadvantages compared to Bitcoin’s predictability.
The absence of a maximum supply cap has been controversial within the crypto community. Bitcoin maximalists often criticise Ethereum’s potentially unlimited supply as inflationary and incompatible with sound money principles. However, Ethereum proponents argue that the dynamic supply model better serves a smart contract platform that must balance multiple objectives: security, decentralisation, sustainability, and economic efficiency.
The current system creates interesting incentive structures. Validators earn a predictable yield through staking, ensuring robust network security regardless of transaction fee levels. Meanwhile, the burn mechanism provides deflationary pressure during high-demand periods, potentially increasing ETH value through scarcity. This dual-mechanism approach attempts to balance stakeholder interests while maintaining network functionality.
Comparing Ethereum to Other Cryptocurrency Models
Bitcoin’s fixed supply model operates on absolute scarcity—only 21 million coins will ever exist. This creates clear deflationary expectations but provides no flexibility for changing network conditions. Ethereum’s variable supply model offers the potential for deflation during high-usage periods while ensuring continuous security incentives through issuance.
Other proof-of-stake networks like Cardano, Solana, and Polkadot employ different approaches to balancing issuance and sustainability. Most maintain higher inflation rates (2-10% annually) to fund network security and development treasuries. Ethereum’s post-merge issuance rate, at under 1% annually, ranks among the lowest in the proof-of-stake category, even before considering burns.
The key differentiator for Ethereum is the burn mechanism—no other major blockchain permanently destroys a portion of transaction fees. This unique feature means Ethereum supply keeps growing at a much slower rate than most competitors during low-activity periods, while potentially achieving deflation during high-activity periods. This volatility in supply growth rate creates both uncertainty and opportunity.
Future Projections for Ethereum Supply
What Ethereum Developers Are Planning
The Ethereum development roadmap includes several upgrades that could impact supply dynamics. The proposed Verkle trees and state expiry mechanisms aim to reduce node operation costs, potentially increasing validator participation and slightly raising issuance. However, these effects would be marginal compared to network activity impacts on burn rates.
More significantly, continued improvements to the Ethereum Virtual Machine (EVM) and transaction processing efficiency could increase the network’s capacity to handle transactions, potentially raising overall fee revenue and burn rates even at lower per-transaction costs. The balance between efficiency gains and total economic activity will determine the net effect on Ethereum supply growth.
Some community members have proposed modifications to the issuance curve, potentially reducing validator rewards if total staked ETH exceeds certain thresholds. Such changes would directly address the supply growth issue by reducing the inflationary baseline. However, implementing monetary policy changes requires substantial community consensus and could face resistance from stakers whose rewards would be impacted.
Long-Term Supply Growth Scenarios
Modelling Ethereum’s future supply requires considering multiple variables: adoption rates, Layer 2 scaling effects, competing blockchain emergence, regulatory developments, and macroeconomic conditions affecting crypto demand. Different scenarios produce vastly different outcomes for ETH supply over the next decade.
In a high-adoption scenario where Ethereum becomes the dominant settlement layer for global finance—processing millions of transactions daily through L2Ss that regularly settle on mainnet—burn rates could consistently exceed issuance. This would result in a gradually declining supply, potentially reducing the total ETH count by millions of tokens over the years. Such deflation would create powerful scarcity dynamics, potentially driving significant price appreciation.
Conversely, a low-adoption scenario where Ethereum faces strong competition from faster, cheaper alternatives might see chronically low mainnet activity. With burns consistently below issuance, Ethereum supply would grow steadily at approximately 0.5-0.7% annually indefinitely. While modest compared to fiat currency inflation, this continuous growth would undermine narratives about ETH as “ultra-sound money.”
The most likely outcome probably lies between these extremes: periods of net deflation during crypto bull markets and high activity, alternating with periods of modest supply growth during quieter times. Over complete market cycles, this might produce a relatively stable supply with slight overall growth or decline depending on the relative duration and intensity of high-activity versus low-activity periods.
Investment Implications of Growing Ethereum Supply
How Supply Dynamics Affect ETH Value
Understanding that the Ethereum supply keeps growing despite the $18 billion burn provides crucial context for investment decisions. While supply is one component of value determination, demand ultimately drives prices. Even with modest supply inflation, surging demand from institutional adoption, DeFi growth, or NFT markets could produce significant price appreciation.
Historical data show a weak correlation between short-term supply changes and price movements. During periods when Ethereum was highly deflationary in late 2021, prices subsequently declined in 2022. Conversely, periods of supply growth in 2024 coincided with price recovery and stability. These patterns suggest that broader market sentiment, adoption metrics, and macroeconomic conditions outweigh supply changes in determining ETH price action.
However, long-term investors should consider supply dynamics when evaluating Ethereum’s store-of-value properties. An asset with a perpetually growing supply faces a higher bar for maintaining purchasing power compared to absolutely scarce assets like Bitcoin. The question becomes whether Ethereum’s utility value and network effects can overcome this inflationary headwind.
Comparing Investment Cases: Ethereum vs Bitcoin
The Ethereum vs Bitcoin debate often centres on supply models. Bitcoin’s fixed 21 million cap creates clear scarcity and predictability—qualities favoured by store-of-value proponents. Ethereum’s variable supply model prioritises network functionality and security over absolute scarcity, reflecting its position as a smart contract platform rather than purely digital gold.
For investors prioritising deflationary assets, Bitcoin’s decreasing issuance schedule (approaching negligible levels after several more halvings) offers stronger guarantees. For investors valuing network utility, developer activity, and ecosystem growth, Ethereum’s flexible model enables functionality improvements and security maintenance that might be challenging with Bitcoin’s rigid approach.
The reality is these networks serve complementary rather than competitive purposes. Bitcoin excels as a pure store of value and medium of exchange, with its simple, predictable monetary policy. Ethereum serves as a programmable infrastructure for decentralised applications, requiring a more complex economic model to balance multiple objectives. Understanding these distinctions helps investors allocate appropriately based on their specific goals and risk tolerance.
Addressing Common Misconceptions
“The Merge Made Ethereum Deflationary” – Myth vs Reality
Perhaps the most widespread misconception is that the merge to proof-of-stake automatically made Ethereum permanently deflationary. Marketing around the merge heavily emphasised potential deflation, creating expectations that ETH supply would shrink consistently post-merge. Reality proved more nuanced.
The merger reduced issuance dramatically, increasing the likelihood of deflation during high-activity periods. However, it didn’t eliminate issuance, nor did it guarantee burns would always exceed issuance. The relationship remains dynamic and activity-dependent. Ethereum can be deflationary—and has been during numerous periods—but isn’t inherently or permanently so.
This misunderstanding has led some investors to disappointment when observing periods where the Ethereum supply keeps growing. Managing expectations around the probabilistic rather than guaranteed nature of deflation helps investors better understand the asset they’re allocating capital toward.
“Ultra-Sound Money” Narrative
The “ultra-sound money” narrative emerged from the Ethereum community to describe post-merge ETH as superior to Bitcoin’s “sound money” properties. The argument suggests that ETH, with its burn mechanism and reduced issuance, achieves better supply dynamics than Bitcoin because it can be deflationary while Bitcoin remains (slightly) inflationary until all BTC are mined.
While clever marketing, this narrative oversimplifies the reality. Ethereum’s supply model offers the potential for superior supply dynamics during high-activity periods but reverts to modest inflation during low-activity periods. Bitcoin’s supply schedule provides absolute predictability, which many economists and investors value highly for planning and store-of-value purposes.
The “ultrasound money” concept works better as an aspirational goal than a current description. For Ethereum to truly achieve this status, it would need to consistently maintain network activity levels sufficient to keep the burn rate above the issuance rate. Whether the Ethereum ecosystem will develop sufficient organic usage to achieve this consistently remains an open question.
Related Factors Affecting Ethereum Supply
Regulatory Impacts on Ethereum Adoption
Regulatory developments significantly impact Ethereum supply dynamics through their effect on network activity. Positive regulatory clarity—such as the approval of spot Ethereum ETFs or favourable treatment of staking activities—can increase adoption and transaction volumes, raising burn rates. Conversely, restrictive regulations or classification of ETH as a security could suppress usage and push the network toward supply growth.
The 2024 approval of spot Ethereum ETFs marked a watershed moment for institutional adoption, potentially driving significant new capital into the ecosystem. However, these ETFs don’t directly generate mainnet transactions; their impact on supply dynamics depends on whether increased institutional interest translates into broader ecosystem adoption and DeFi usage.
Staking-related regulations particularly matter for supply dynamics. If regulatory frameworks make staking more accessible to institutions and retail investors, increased staking participation could raise issuance slightly while also potentially signalling confidence that drives broader adoption and activity. The net effect on whether Ethereum supply keeps growing depends on which force dominates.
Competition from Alternative Smart Contract Platforms
Ethereum faces intensifying competition from platforms like Solana, Avalanche, Cardano, and newer entrants offering higher throughput and lower fees. This competition directly impacts Ethereum’s transaction volumes and consequently its burn rate. If users migrate activities to competing chains, reduced mainnet activity would increase supply growth by lowering burns relative to issuance.
However, Ethereum maintains a significant advantage, including first-mover benefits, network effects, developer mindshare, and superiodecentralisation. The base layer of Ethereum, combined with its L2 ecosystem, offers a compelling value proposition that has retained dominance in key sectors like DeFi and NFTs. Whether this dominance persists as competition evolves will significantly influence long-term supply dynamics.
The development of cross-chain infrastructure and multi-chain strategies by major protocols adds complexity. Users might maintain positions across multiple chains, diversifying their activities rather than choosing exclusively. This scenario would likely reduce Ethereum’s share of total crypto activity, potentially contributing to continued supply expansion unless offset by absolute growth in the overall crypto economy.
Conclusion
The paradox of Ethereum burning $18B yet supply keeps growing ultimately reflects the complex, dynamic nature of the network’s post-merge token economics. Far from being a design flaw, this represents a sophisticated balancing act between ensuring network security through consistent validator rewards and creating deflationary pressure during periods of high demand. The merge successfully reduced issuance by 90%, but complete deflation requires sustained network activity levels that depend on broader adoption and usage patterns.
For investors, developers, and users, understanding these supply dynamics provides crucial context for evaluating Ethereum’s long-term value proposition. Ethereum supply keeps growing during quieter periods—but at rates far below traditional fiat currencies and most competing blockchains. During high-activity periods, the network achieves deflation that validates the “ultrasound money” narrative. Over complete market cycles, supply changes likely remain modest compared to demand fluctuations driven by adoption, regulation, and macroeconomic conditions.
Read more: Ethereum Price Prediction: Hottest Crypto Assets For Returns
