Ethereum (ETH) is on the brink of reaching a new supply high by the end of 2024. This milestone comes amidst persistent inflation and the growing influence of Layer 2 networks. As Ethereum continues to evolve, understanding its supply dynamics and the impact of transaction fees becomes crucial. In this article, we’ll explore the factors driving Ethereum’s inflation, the role of Layer 2 solutions, and what this means for the future of this leading cryptocurrency.

Introduction to Ethereum’s Supply Dynamics

Ethereum (ETH) has been experiencing a small but persistent inflationary trend. By the end of 2024, the token’s supply is expected to expand to a new high. This inflation is partly due to the network’s transition to proof-of-stake, which has altered the dynamics of token production and burning.

The total supply of ETH is not capped, and it has already reached an all-time high of 120,532,000 tokens. This supply level was achieved after Ethereum’s chain switched to proof-of-stake and started burning a portion of the transaction fees. As of now, the network has struck a balance between new token production and burns, destroying a total of 4,479,978 ETH. Consequently, the supply fell to a low of 120.07 million in April 2024. However, since then, Ethereum has returned to inflationary periods, increasing the total supply to 120.25 million tokens. In Q2 alone, ETH added 120,818 tokens to its supply.

At this rate of growth, the network may break its previous supply record by the end of 2024. Ethereum’s network turned inflationary throughout Q2, as the transaction burn rate slid by as much as 66.7%. Average transaction fees remain relatively high, reaching above $10 during times of more active network usage. In recent weeks, Ethereum fees have ranged between $2 and $4, while Solana’s fees only reached $0.02.

The Rise of Layer 2 Networks and Their Impact

Ethereum is already feeling the effect of scaling, as traffic flows to some of the Layer 2 (L2) networks. This trend was long greeted as a solution to high fees for using Ethereum directly to trade on decentralized exchanges (DEX) or swap NFTs. However, the shift may have long-term effects on Ethereum’s performance over time.

Layer 2 transactions have doubled their activity compared to 2023 baseline levels. In Q2, activity rose by another 37%. L2 chains have also turned competitive, with traffic moving to the best and most liquid chains. As a result, Ethereum users moved assets to L2 chains, with the biggest net inflows for Optimism, Arbitrum, and Base.

Polygon now carries around 22 million weekly transactions, with 26 million for Base. Arbitrum carries around 10 million weekly transactions. The Ethereum mainnet still logs around 420,000 daily users and 1 million daily transactions. More than $12 billion has been locked in bridges between Ethereum and other L2 projects. Most of the bridged assets include ETH in wrapped forms, as well as ERC-20 tokens and stablecoins.

Understanding Ethereum’s Inflation and Transaction Fees

In the past three months, the growth rate of new supply has accelerated. While year-on-year supply growth is just 0.03%, the past month produced around 60,000 new tokens. For now, the ETH market can easily absorb the assets, either through ETF sales, liquid staking, or other lockups in smart contracts. The gradual inflation is the price to pay for being able to run scalable chains.

Annualized inflation for Ethereum’s network is now at 0.63%. The Ethereum chain now carries a baseline of 1.2 million transactions per day, with much rarer days of peak activity. For now, Ethereum supporters see the chain as reaching a balance between high fees and scalability, with a reasonable inflation rate.

Crypto Coin Price Prediction for Ethereum

In the past month, ETH failed to rally despite the launch of the first batch of ETFs. ETH even turned into the worst-performing asset among the top 50 coins and tokens for the past month. ETH is also showing signals of touching its long-term trendline, potentially expecting a bounce.

The Ethereum inflation of 60,000 tokens for the past month is still relatively small compared to rapid selling from Grayscale’s wallets. Grayscale has divested 24% of its holdings since the launch of the ETHE ETF.

ETH has historically underperformed in August for the past years. This time, ETH has a unique set of price factors, as traders wait to see more ETF inflows. Traders see ETH entering re-accumulation with a brief dip under $3,000 and resistance levels at $3,800. On the upside, ETH may attack short positions around $3,400.

Ethereum’s Role in Web3 Solutions and Staking

Ethereum continues to play a pivotal role in the Web3 market. Its position as a leading blockchain for smart contracts, decentralized finance (DeFi), and NFTs remains unchallenged. The rise of Layer 2 solutions has further cemented Ethereum’s role in the Web3 ecosystem by providing scalable and cost-effective alternatives for users.

Staking has also become a significant aspect of Ethereum’s ecosystem. With the transition to proof-of-stake, staking has allowed users to earn rewards while contributing to the network’s security. This has led to increased participation and lockup of ETH in staking contracts, reducing the circulating supply and potentially impacting the token’s price dynamics.

Future Trends: Crypto Set to Explode in 2023

The cryptocurrency market is poised for significant growth in the coming years. Several factors indicate that crypto prices are set to rise, with Ethereum being a key player in this trend. The adoption of Layer 2 solutions, the increasing use of Web3 applications, and the growing interest in staking are all contributing to the positive outlook for Ethereum and other cryptocurrencies.

Investors and traders are keeping a close eye on the market, looking for opportunities in cryptocurrencies expected to rise. Ethereum’s strong fundamentals, combined with its ongoing developments, make it a top contender for future growth. As the crypto market continues to evolve, Ethereum’s role in driving innovation and adoption will be crucial.

Summary: What to Expect from Ethereum’s Supply Growth

In summary, Ethereum’s supply is set to hit a new record by the end of 2024, driven by persistent inflation and the growing influence of Layer 2 networks. The network’s ability to balance token production and burns, along with the impact of transaction fees, will play a significant role in shaping its future.

As Ethereum continues to evolve, its position in the Web3 market, the rise of Layer 2 solutions, and the increasing participation in staking will all contribute to its growth. Investors should keep an eye on these developments and consider the potential impact on Ethereum’s price and market dynamics.

With the cryptocurrency market set to explode in the coming years, Ethereum remains a key player to watch. Its strong fundamentals, combined with ongoing innovations, make it a promising investment for those looking to capitalize on the future of digital assets.

The author does not own or have any interest in the securities discussed in the article.