The Ethereum network is witnessing a notable shift in its token supply dynamics, with the total circulating supply of Ether (ETH) climbing back to levels last seen before The Merge in 2022. As of early 2025, ETH’s supply has reached approximately 120.5 million, matching its pre-upgrade volume and raising questions about the long-term implications of recent protocol changes.
This resurgence in supply marks a reversal from the deflationary trend that followed The Merge in September 2022, when Ethereum transitioned to a proof-of-stake (PoS) consensus mechanism and introduced fee-burning mechanics through EIP-1559. At its lowest point in April 2024, ETH’s supply dipped to around 120,064,500, signaling strong deflationary pressure. However, just months later, the trend reversed—coinciding with the Dencun upgrade in March 2024.
Why Is Ethereum’s Supply Increasing?
Analysts point to the Dencun upgrade as the primary driver behind this shift toward inflationary pressure. The upgrade introduced support for blob transactions, a new data-carrying mechanism designed to drastically reduce transaction costs for Layer 2 (L2) rollups.
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Prior to Dencun, Ethereum users paid transaction fees based on gas price multiplied by gas usage, with a significant portion of those fees permanently burned. This burn mechanism helped create deflationary pressure during periods of high network activity.
However, blob transactions operate under a separate pricing model using "blob gas", which is not subject to the same burn rules as standard execution gas. As more L2s adopt blob-based transactions to scale efficiently, the proportion of fees being burned across the network has declined.
“With Dencun, we’ve decoupled data scaling from execution scaling,” explains Jaehyun Ha, analyst at Presto Research. “While this boosts scalability and lowers user costs, it also reduces the effectiveness of the fee-burn mechanism that once supported ETH’s deflationary narrative.”
As a result, even though overall network usage remains strong—or possibly increasing—the net effect on supply is no longer deflationary. In fact, the reduced burn rate means new ETH issuance now outpaces destruction, leading to supply expansion.
The "Ultrasound Money" Narrative Under Pressure
One of the most compelling narratives post-Merge was that ETH could evolve into “ultrasound money”—a deflationary digital asset secured by staking and reinforced by continuous token burns. That vision now faces challenges.
With fewer fees being burned and supply creeping upward, critics argue the economic model is shifting. While current inflation rates remain low in absolute terms, the psychological impact on long-term holders and institutional investors could be significant.
Byoungjoon Kim, researcher at DeSpread Research, warns that if unchecked, prolonged supply growth may undermine confidence in Ethereum’s monetary policy.
“The security of a PoS network like Ethereum is tied directly to the value and scarcity of its native token,” Kim notes. “If ETH becomes persistently inflationary, it could affect staking yields and investor sentiment over time.”
Still, many experts agree that this isn’t an immediate crisis. Network activity remains robust, developer engagement is high, and Layer 2 adoption continues to surge—indicating healthy demand despite changing supply dynamics.
Pectra Upgrade Looms: More Blob Space Ahead?
Looking ahead, Ethereum’s next major upgrade—Pectra—is expected in the first half of 2025. One of its key components includes an Ethereum Improvement Proposal (EIP) to increase both the blob transaction target and maximum limit per block.
This enhancement aims to further improve scalability for L2 networks like Arbitrum, Optimism, and zkSync by allowing more data to be processed per block. But it comes at a cost: even greater reduction in fee burns, potentially accelerating supply inflation.
“If Pectra increases blob capacity as expected, we could see even lower burn rates,” says Ha. “Unless base layer activity or transaction values rise significantly, ETH’s path may remain inflationary for the foreseeable future.”
Ethereum Community Approves Gas Limit Increase
In a related development, the Ethereum community recently reached consensus to raise the network’s gas limit from 30 million to 36 million units per block—the first such increase since 2021.
This adjustment allows miners (or validators) to include more transactions per block, improving throughput during peak demand periods. It reflects ongoing efforts to enhance network scalability without compromising decentralization or security.
While higher gas limits can help manage congestion and stabilize fees, they also signal a prioritization of performance over strict supply control—a strategic trade-off in Ethereum’s evolution.
Core Keywords & SEO Integration
Throughout this analysis, several core keywords naturally emerge:
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These terms reflect key search intents around Ethereum’s economic model, recent upgrades, and future outlook—ensuring alignment with what users are actively researching in early 2025.
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Frequently Asked Questions (FAQ)
Q: Is Ethereum still deflationary after the Dencun upgrade?
A: No. Since the Dencun upgrade in March 2024, Ethereum has shifted toward a mildly inflationary supply model due to reduced fee burning from blob transactions. While network activity remains high, the lower burn rate means new issuance exceeds destruction.
Q: What are blob transactions and why do they affect ETH supply?
A: Blob transactions are a new type of operation introduced in Dencun that carry large amounts of data at lower cost, primarily used by Layer 2 networks. Unlike regular transactions, blob gas fees are not burned, reducing the overall deflationary pressure on ETH.
Q: How does the Pectra upgrade affect Ethereum’s tokenomics?
A: Expected in early 2025, Pectra will likely increase blob space per block, enabling greater L2 scalability. However, this will further reduce fee burns and could accelerate supply growth unless offset by higher base-layer demand.
Q: Does a rising ETH supply threaten network security?
A: In theory, yes. Under proof-of-stake, network security relies on the value and scarcity of staked ETH. Persistent inflation could dilute staking rewards over time and weaken investor confidence if not balanced with strong utility and demand.
Q: Why did Ethereum raise its gas limit?
A: The gas limit was increased from 30M to 36M to improve transaction throughput and reduce congestion during high-usage periods. This supports scalability while maintaining decentralization—a critical step as L2 activity grows.
Q: Can Ethereum regain its deflationary status?
A: Yes—but it would require either a redesign of blob fee mechanics to include partial burns or a substantial rise in non-blob transaction volume and fees. For now, mild inflation appears to be the new baseline.
Final Outlook: Balancing Scalability and Scarcity
Ethereum stands at a pivotal moment in its evolution. The success of Layer 2 scaling via Dencun has come with unintended consequences for its monetary policy. While enhanced scalability benefits users and developers, it challenges the “ultrasound money” thesis that once defined ETH’s long-term value proposition.
The coming months will be crucial as the Pectra upgrade approaches and stakeholders assess whether Ethereum can maintain economic sustainability without sacrificing decentralization or performance.
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For investors and participants, understanding these shifts is essential—not just for predicting price trends, but for evaluating the health and resilience of one of blockchain’s most influential ecosystems.