Ethereum’s Supply Approaches Pre-Merge Status: A Sign of Proof-of-Stake Ineffectiveness?

Key Points

• Ethereum’s supply is nearing its highest level in two years, currently at 120,501,906.
• The number of validators on the Ethereum network has decreased by approximately 2% in the last three months.

The supply of Ethereum is on the rise, reaching levels not seen in nearly two years.

This increase in supply could potentially limit Ethereum’s ability to make gains, as it has recently been underperforming against Bitcoin and other leading altcoins.

Ethereum Supply Nearing Two-Year High

Data from CryptoQuant indicates that Ethereum’s supply is currently at 120,501,906, the highest it’s been since February 2023.

If this trend continues, the supply could soon reach levels seen prior to the Ethereum Merge.

The Merge event, which transitioned Ethereum from a Proof-of-Work (PoW) system to a Proof-of-Stake (PoS) system, was designed to make Ethereum deflationary.

Despite this, Ultrasound Money data shows that Ethereum’s supply has increased by 45,724 ETH in just the last month.

Decrease in Validator Count

Ethereum’s PoS system relies on validators who stake ETH to validate transactions.

However, the number of validators on the network has decreased by around 2% to 1,057,356 over the last three months.

This drop suggests an increase in unstaking activity, leading to the rising supply.

Additionally, there has been a decrease in activity on the Ethereum mainnet, which could also be contributing to the increased supply.

Each transaction on Ethereum has a base fee paid in ETH that is later burned to make Ethereum deflationary.

However, decreased mainnet activity results in fewer tokens being burned and an increase in supply.

Data from L2Beat shows that most activity has shifted from the Ethereum mainnet to layer two networks.

As more users turn to Ethereum’s layer two networks instead of the mainnet, this could further suppress the burning process and increase the supply.

Bitcoin continues to outperform Ethereum, with the ETH/BTC ratio dropping to its lowest level since March 2021.

The ETH/BTC ratio has been trading within a descending parallel channel on its weekly chart.

Following a recent dip, it has breached the lower trendline of the channel, indicating that Ethereum is in a downtrend and could record new lows.