Ethereum’s Inflation Boosts Network Utility Despite Market Concerns, Experts Suggest

The second-largest cryptocurrency in the world, Ethereum, has recently seen a rise in its supply, prompting debates among analysts about whether this shift will help or harm the network’s long-term viability. While the cryptocurrency’s inflationary turn has raised eyebrows in the financial community, several experts suggest that this may not be as negative as it first appears.

Since early 2024, Ethereum’s circulating supply has increased by over 262,000 ETH, reaching more than 120 million tokens as of September, according to data from Ultra Sound Money. This increase, which could push the total supply up by $1.5 billion by the end of the year, follows a reduction in Ethereum’s notoriously high gas fees, fees that users pay to complete transactions on its blockchain.

At first glance, rising inflation might seem like a red flag for Ethereum holders, particularly for those who were drawn to its deflationary potential in the wake of The Merge—Ethereum’s landmark shift to a proof-of-stake model in 2022, which initially decreased token issuance. However, experts like Sasha Ivanov, the founder of the Waves blockchain platform, argue that Ethereum’s inflationary characteristics can actually boost its utility.

“Ethereum is designed as a utility token,” Ivanov explains. “It powers a decentralized finance [DeFi] ecosystem, meaning the focus is not on scarcity, as it is with Bitcoin, but on long-term network sustainability. Ethereum’s emission model ensures that network validators are always rewarded for their contributions, encouraging active participation.”

Ethereum’s inflation rate currently stands at around 0.7%, a figure analysts say will total around 600,000 ETH—or $1.44 billion—by year-end. Comparatively, Bitcoin’s inflation rate hovers near 0.8%, though Bitcoin remains inflationary until it reaches its fixed supply cap of 21 million tokens sometime in the next century. Solana, another prominent blockchain, boasts a much higher inflation rate of 8.9%.

Inflationary Forces Could Encourage Activity

Unlike Bitcoin, Ethereum’s supply isn’t capped, allowing for greater flexibility in how the network can reward users and validators. Shubh Varma, CEO of Hyblock Capital, argues that a steady, low inflation rate could serve as a catalyst for increased network activity. “The idea is that a certain level of inflation encourages users to spend rather than hold ETH, driving more economic activity within the Ethereum ecosystem,” he says.

This concept might seem counterintuitive to those who view inflation as an erosion of value. But in Ethereum’s case, inflation can serve as a driver for its utility—encouraging people to use the token within the decentralized finance ecosystem, rather than hoarding it in hopes of future price appreciation.

The drop in gas fees—an outcome of Ethereum’s latest upgrade, Dencun, introduced in early 2024—has contributed to a lower “burn rate,” or the number of tokens removed from circulation to keep the supply in check. Since March, the burn rate has decreased, resulting in more tokens being issued than burned. Despite this, Ethereum co-founder Vitalik Buterin has praised the Dencun upgrade for lowering transaction costs, reportedly saving users up to $100 million in fees.

“Low gas fees, introduced by Dencun, could lead to some inflation,” Varma continues, “but they also make the network more attractive to new users, which supports greater demand and overall growth.”

A Unique Monetary Policy

Ryan Lee, the chief analyst at Bitget Research, agrees that Ethereum’s inflation is not necessarily a bad thing, especially when compared to other blockchain networks. However, he cautions that the rise in supply could lead to short-term declines in investor sentiment, as market participants adjust to the network’s new monetary dynamics.

“The increase in circulating ETH may raise questions about long-term value,” Lee notes. “However, we’ve seen this pattern before—low gas fees typically signal a price floor for Ethereum, and this could lead to a rebound in the medium term.”

Lee points out that Ethereum’s inflationary model is designed to support its broader goals of network growth and utility, rather than act as a store of value, as Bitcoin does. This perspective is critical in understanding why Ethereum’s monetary policy allows for more flexibility than Bitcoin’s hard-capped supply model.

“Bitcoin’s deflationary model is often cited as a long-term security feature,” Lee adds, “but Ethereum’s adaptability—its ability to adjust its inflation based on network needs—is a key element of its design. While this flexibility might introduce uncertainty, it could also be a powerful tool in sustaining the network over time.”

The Road Ahead for Ethereum

Ethereum’s ability to scale, especially through Layer 2 solutions, will be essential in balancing inflationary pressures. The network’s ongoing updates, such as Dencun, have successfully reduced fees and improved transaction speeds, but Ethereum still faces the challenge of ensuring that these improvements don’t come at the cost of underutilization of its core Layer 1 network.

As analysts point out, Ethereum’s success hinges on continued adoption of its decentralized finance ecosystem. Inflation, in this context, can actually be a sign of a healthy, growing network—as long as the token continues to be used in real-world applications rather than being treated as a speculative asset.

While Bitcoin has positioned itself as digital gold with its fixed supply, Ethereum is carving out a different path, one where utility trumps scarcity. As the network continues to grow and develop, its inflationary characteristics may prove to be a feature, not a flaw.

Ethereum may not always remain inflationary. Its ability to shift between inflationary and deflationary models—based on network activity and fee burning—illustrates its unique position in the world of cryptocurrencies. As Ethereum’s ecosystem expands, its monetary policy will likely continue to evolve in ways that enhance both its utility and value.