ETH is experiencing inflation again.

Recent reports from various crypto data platforms have caught everyone’s attention, revealing that ETH is once again inflating. But when you consider that most cryptocurrencies, including BTC, are also inflating, it’s not as shocking. And when you dive into the specific numbers, you might even find it comforting.

The reason ETH inflation is getting so much attention is that we often compare "Second Fiddle" ETH with "Big Daddy" Bitcoin. However, the value logic behind ETH and BTC is fundamentally different.

If BTC’s growth logic is “scarcity equals value,” then ETH’s growth logic is “innovation equals value.” Here, “innovation” refers to continuous improvements. Even the latest bout of inflation is driven by ETH’s ongoing innovation.

1. ETH’s Deflation and Inflation Are Both Driven by Innovation

Ethereum (ETH) has long been known for its continuous innovation and dynamic ecosystem. Both deflation and inflation in ETH supply are closely tied to Ethereum's ongoing technological advancements.

1.1 Deflation: Supply Reduction Driven by Mechanism Innovation

Since Ethereum 2.0 implemented the Proof of Stake (PoS) mechanism, the issuance process for ETH has undergone a significant change. PoS encourages users to stake their ETH, thereby helping to secure the network. This mechanism links new ETH issuance directly to network security and activity. Coupled with the EIP-1559 “burn” mechanism introduced in 2021, ETH’s supply began to decrease significantly.

EIP-1559 revamped Ethereum’s transaction fee structure, where a portion of each transaction fee is permanently burned. This mechanism effectively offsets newly issued ETH, especially during periods of high network activity, leading to a long-term deflationary trend in Ethereum’s supply. In fact, from late 2022 to early 2024, with Ethereum’s frequent and active network activity, a significant amount of ETH was burned, continuously reducing the total supply. This period of deflation was a direct result of Ethereum's successful innovative mechanisms.

1.2 Inflation: Supply Increase Triggered by Fee Reduction Innovation

However, starting in 2024, Ethereum’s supply began to increase, marking a notable inflationary phase. This change wasn’t random but a result of the latest round of innovations. Notably, in March 2024, Ethereum’s “Dencun” upgrade marked a new phase of technological innovation.

The “Dencun” upgrade included several Ethereum Improvement Proposals (EIPs), with EIP-4844 being the most crucial. EIP-4844 introduced a brand-new data storage mechanism that significantly reduced transaction fees on both the Ethereum mainnet and Layer 2 networks. While this optimization improved network efficiency, it also reduced the amount of ETH being burned, leading to a net issuance of 75,301 ETH since the beginning of 2024. This marked the first time since late 2022 that Ethereum's supply saw a net increase.

These innovations not only demonstrate the technical prowess and forward-thinking of the Ethereum community but also reflect a commitment to long-term sustainability. Regardless of supply fluctuations, the core goal remains to enhance the security, efficiency, and user experience of the Ethereum network. Through continuous technological progress, Ethereum maintains its leading position in the blockchain space, driving the entire industry forward. This dynamic, ever-evolving innovation is the true essence of Ethereum.

2. The Deflationary Trend in ETH Hasn’t Been Reversed

Even though there was a period of inflation in 2024, Ethereum’s total supply has still decreased by approximately 345,000 ETH since the “Merge” in 2022, indicating that the long-term deflationary trend remains largely intact. Several key factors contribute to this phenomenon:

2.1 EIP-1559 Burn Mechanism

EIP-1559, introduced in 2021, was a significant Ethereum Improvement Proposal that changed Ethereum's transaction fee structure by introducing a “burn” mechanism. In each transaction, the base fee is automatically burned, permanently removing ETH from circulation. This mechanism ensures that during periods of high network activity, a substantial amount of ETH is burned, directly offsetting new issuance.

Before the “Merge,” Ethereum still operated under the Proof of Work (PoW) mechanism, where ETH was issued at a relatively high rate. But after the “Merge,” Ethereum transitioned to a PoS mechanism, significantly reducing the rate of new ETH issuance, which further enhanced the impact of the burn mechanism on supply.

2.2 PoS’s Low Issuance Rate

Under PoW, Ethereum’s daily issuance was much higher, with approximately 13,000 ETH being mined daily. However, after the “Merge,” under PoS, the daily issuance dropped to around 1,600 ETH—about 90% less than in the PoW era. Annually, this means about 584,000 ETH are issued under PoS, compared to 4.8 million ETH under PoW.

This stark difference means that after transitioning to PoS, Ethereum’s inflationary pressure has been greatly reduced. Combined with EIP-1559’s burn mechanism, the low issuance rate under PoS means that during periods of high network activity, the amount of ETH burned sometimes exceeds the amount issued, leading to net deflation.

2.3 Active Network Activity

Ethereum’s network activity directly affects the amount of ETH burned. From late 2022 to early 2024, Ethereum experienced a period of highly active network activity, during which several major events and popular applications led to a significant amount of ETH being burned, reducing the total supply. Against this backdrop, despite the short-term inflation caused by the “Dencun” upgrade in 2024, the overall supply trend remained deflationary.

1. The Continued NFT Boom

The NFT market remained hot in 2023, with trading volumes surging as new artists and brands entered the space. Each NFT transaction involved burning a significant amount of ETH, particularly on popular Ethereum-based NFT marketplaces like OpenSea. High-profile NFT series like CryptoPunks and Bored Ape Yacht Club continued to set auction records, resulting in large-scale ETH burns.

2.Expansion of Decentralized Finance (DeFi)

DeFi protocols on Ethereum continued to flourish in 2023, with platforms like Uniswap, Aave, and Compound seeing a massive increase in lending, liquidity mining, and trading activities. These activities generated significant transaction fees, which were burned under EIP-1559, further reducing ETH supply.

3.Rapid Growth of L2 Solutions

Layer 2 (L2) scaling solutions experienced explosive growth in 2023 and early 2024. Networks like Arbitrum and Optimism attracted a large user base to migrate their transactions to L2 networks. These transactions still required settlement on the Ethereum mainnet, leading to ongoing transaction fees and significant ETH burns. This allowed Ethereum to maintain high levels of ETH burning while ensuring network scalability.

It was these vibrant network activities that led to a substantial amount of ETH being burned during this period, significantly reducing the total supply. Therefore, even though the “Dencun” upgrade in 2024 caused short-term inflation, the strong prior burns kept the overall supply trend on a long-term deflationary path. These events not only showcased the diversity and vitality of the Ethereum ecosystem but also demonstrated the effectiveness of its supply management.

As the saying goes, just talking about inflation without discussing the inflation rate is like only dating without committing—both are misleading.

3. What Is ETH’s Inflation Rate?

According to data from January 1, 2024, to August 5, 2024, Ethereum saw a net increase of 75,301 ETH over these eight months.

To estimate the net increase for the entire year, we can assume the remaining four months will see a similar increase, averaging approximately 9,412.625 ETH per month.

Thus, the projected net increase for the last four months of 2024 is:

9,412.625 ETH × 4 months = 37,650.5 ETH

Adding this figure to the first eight months’ increase of 75,301 ETH gives us the estimated net increase for the whole of 2024:

75,301 ETH + 37,650.5 ETH = 112,951.5 ETH

The total supply of Ethereum at the end of 2023 was 120,516,988 ETH.

The projected total supply for 2024 is:

120,516,988 ETH + 112,951.5 ETH = 120,629,939.5 ETH

The annual inflation rate calculation is as follows:

Inflation rate = (Net increase / 2023 year-end total supply) × 100%

Inflation rate = (112,951.5 / 120,516,988) × 100% ≈ 0.0936%

In summary, Ethereum’s estimated annual inflation rate for 2024 is approximately 0.0936%.

This less-than-0.1% inflation rate is far below Bitcoin’s post-halving inflation rate of 0.85% and significantly lower than the 6-8% inflation rate of its major competitor, Solana.

4. The Different Value Logics of ETH and BTC

To understand the impact of ETH inflation, it’s crucial to recognize that the value logic of ETH and BTC are fundamentally different. BTC’s value logic can be summarized in one phrase: “scarcity equals value.” As “digital gold,” Bitcoin’s primary value comes from its fixed supply and decentralized trust mechanism. With a total supply capped at 21 million coins, Bitcoin becomes increasingly scarce over time, especially after each halving. As a result, holding BTC has become a mainstream investment strategy for preserving value, with BTC representing a scarce asset with significant appreciation potential.

In contrast, ETH’s value logic is: “innovation equals value.” Ethereum is not just a cryptocurrency; it’s the fuel for a global computing network. As a smart contract platform, Ethereum’s value is primarily driven by the innovation and vitality of its ecosystem. ETH is widely used to pay transaction fees, staked to secure the network, and as a foundational asset in various decentralized finance (DeFi) projects. Therefore, ETH’s value depends not just on its supply but on the continuous innovation and development of the Ethereum ecosystem. Each technological upgrade and new use case brings new growth potential to ETH. Every innovation in Ethereum not only injects new vitality into its ecosystem but also acts as an engine driving its value growth.

History of Innovation: From PoW to PoS to AVS

Ethereum’s innovation has never ceased. From the initial Proof of Work (PoW) to the transition to Proof of Stake (PoS) in 2022, and now with EigenLayer introducing the Active Validation Service (AVS), each step of innovation has driven the evolution of the Ethereum network.

PoW was Ethereum’s original consensus mechanism, where miners validated transactions and added blocks by solving complex mathematical problems. However, the high energy consumption and efficiency issues of PoW led the Ethereum community to explore more sustainable solutions. With technological advancements and community efforts, Ethereum successfully completed "The Merge" in September 2022, officially transitioning from PoW to PoS.

Under the PoS mechanism, ETH holders can stake their ETH to maintain network security and earn rewards. Stakers lock their ETH in the network, participating as validators in the consensus process in exchange for rewards. This mechanism not only reduces energy consumption but also tightly links network security with ETH issuance, establishing a more sustainable issuance model where new ETH is minted proportionally to the amount staked.

The innovation of the AVS restaking model lies in its ability to reuse staked ETH across multiple independent service protocols. Stakers not only help secure the Ethereum mainnet but can also restake their ETH across various decentralized protocols to earn additional rewards.

This provides multiple benefits for stakers:

1. Diversified Revenue Streams: Through restaking, stakers can participate in multiple network validation services simultaneously. For example, while ensuring the security of the Ethereum mainnet, stakers can restake the same ETH in DeFi protocols, Layer 2 solutions, or other decentralized applications to earn additional token rewards. This greatly enhances the earning potential for stakers.

2. Increased Asset Utilization: The AVS restaking model effectively increases the utilization rate of staked assets. Traditional staking typically locks assets within a single network, but with restaking, stakers can flexibly allocate their assets across multiple networks, maximizing their returns. This mechanism not only increases stakers’ income but also boosts the liquidity and security of the entire network.

Because of this, ETH investment strategies differ from those for BTC. While hoarding is a common strategy for BTC, for ETH, actively participating in the ecosystem through staking, restaking, and DeFi projects might be a more effective way to enhance value.

5. The Proper Use of ETH

ETH is the core asset of the Ethereum ecosystem, and its use extends far beyond mere holding. Through staking and restaking, ETH holders can not only earn steady returns but also maximize their investment gains. Additionally, as the Ethereum ecosystem continues to expand, participating in new projects can also bring unexpected airdrop rewards. Here’s a detailed overview of staking, restaking returns, and current airdrop opportunities.

5.1 Staking Yields

Staking is a core feature of ETH 2.0. Under Ethereum’s PoS mechanism, ETH holders can stake their ETH to help secure the network and earn corresponding rewards. Currently, staking yields range from approximately 3% to 6% annually, depending on network participation and validator performance.

Stakers lock their ETH into the network to become validators, earning new ETH as rewards. These rewards are tied to the network’s issuance and are closely linked to staker participation and overall network staking ratio. Stakers not only enjoy relatively stable returns but also contribute to the network’s security.

5.2 Restaking Yields

Restaking is an extension of the staking mechanism that allows staked ETH to be leveraged in other protocols. The concept of restaking, proposed by EigenLayer, allows stakers to restake their ETH across different DeFi protocols to earn additional returns. Currently, restaking yields can reach 10% to 15% or more annually, depending on the protocols and the risk-reward profiles of the projects involved.

Through restaking, stakers can not only earn staking rewards on the Ethereum mainnet but also utilize these staked ETH in other decentralized applications (DApps) or financial protocols, such as lending platforms or liquidity mining. Restaking expands the use cases of ETH, allowing investors to maximize the efficiency of their assets.

5.3 Ongoing Airdrop Projects

As the Ethereum ecosystem continues to expand, restaking mechanisms are becoming an important innovation to attract users. Many protocols are using restaking to incentivize participation, offering additional returns and airdrop rewards. Here are some of the protocols and tokens currently associated with restaking, providing participants with unique opportunities.

• EigenLayer Airdrop: EigenLayer is a pioneer in the restaking mechanism, allowing users to restake their ETH staked on the Ethereum mainnet in other protocols to provide multiple validation services. This innovation not only increases staker yields but also gives them the chance to receive a future airdrop of EigenLayer’s native token.

• Ether.Fi (eETH), Puffer (puffETH), Renzo (ezETH), KelpDAO (rsETH): These are liquidity restaking protocols currently conducting airdrops.

For a deeper understanding of restaking, I recommend reading “The Demystification of Restaking.” If you’re looking to maximize your restaking returns, check out “How to Maximize Restaking Returns: A Practical Guide.”

Conclusion

While ETH does experience inflation, it is not severe. While “scarcity equals value” is the core logic of Bitcoin, for Ethereum, “innovation equals value” is its true essence.

In the open-source blockchain world, scarcity is not the most effective moat; continuous innovation is. Ethereum has continuously consolidated its leading position in the industry through persistent innovation.

Ethereum’s Pectra upgrade, set for early 2025, will improve user experience and network efficiency by enhancing account abstraction, staking mechanisms, scalability, and smart contract development. This will further increase Ethereum’s appeal, encourage more users and institutions to participate, and strengthen its position as the leading smart contract platform.

For you, the best way to invest in ETH isn’t just to hold and wait but to actively participate in staking, restaking, and various DeFi projects, letting your ETH continuously create value. This approach not only allows you to earn more returns and airdrop rewards but also contributes to the growth and prosperity of the entire Ethereum community.

[For more content, please visit the Airdrop Project Base]