Ethereum’s ambitious transition toward “ultra-sound money” status has hit a significant roadblock. Following the Dencun upgrade in March 2024, new data from CryptoQuant reveals that the net supply of ether is growing at its fastest daily rate since the Merge in September 2022, raising uncomfortable questions about the second-largest cryptocurrency’s monetary policy and long-term value proposition.
TL;DR
- Ethereum’s supply is growing at its fastest rate since the Merge, according to CryptoQuant data highlighted on May 13, 2024
- The Dencun upgrade reduced Layer 2 transaction fees by approximately 4x, slashing the amount of ETH burned through EIP-1559
- CNBC featured CryptoQuant head of research Julio Moreno discussing the inflationary implications on May 13
- ETH traded at $2,949 with a 7.89% weekly decline, underperforming Bitcoin’s modest 0.41% dip
- The reversal challenges Ethereum’s “ultra-sound money” narrative that gained traction post-Merge
How Dencun Broke the Burn
When Ethereum completed the Merge in September 2022, switching from proof-of-work to proof-of-stake, it dramatically reduced new ETH issuance. Combined with EIP-1559’s fee-burning mechanism — which destroys a portion of every transaction fee — many ETH holders celebrated the emergence of a deflationary supply dynamic. The community even coined the term “ultra-sound money” to describe this new monetary paradigm.
The Dencun upgrade, activated on March 13, 2024, was designed to make Ethereum’s Layer 2 ecosystem more competitive by introducing “blob” storage for cheaper data availability. It succeeded in its primary objective, reducing average transaction fees on L2 networks by roughly four times. However, this success came with an unintended side effect: with fewer fees being paid on the Ethereum base layer, significantly less ETH was being burned through EIP-1559.
The math is straightforward. Lower fees mean less ETH destroyed per transaction. Meanwhile, staking rewards continue to issue new ETH at a steady clip. The net result is that Ethereum’s supply, which had been contracting under the deflationary regime, is now expanding again.
The Numbers Behind the Shift
On May 13, 2024, CoinMarketCap data showed Ethereum trading at $2,949, reflecting a 0.71% gain over 24 hours but a more concerning 3.70% decline over the previous week. The broader market picture was equally telling: Bitcoin dominated at 60.3% of total market capitalization, while Ethereum’s share stood at just 10.7%. The total crypto market cap hovered around $2.61 trillion with a Fear & Greed Index reading of 45 — firmly in neutral territory.
Altcoins were faring even worse. Solana had declined 5.62% over seven days, trading at $147, while Polkadot suffered a steeper 10.72% weekly drop to $6.47. The overall altcoin market was under significant pressure, and Ethereum’s inflationary supply dynamics were doing little to bolster confidence.
Julio Moreno’s CNBC Appearance
The inflationary supply issue gained mainstream attention on May 13 when CNBC’s Crypto World featured Julio Moreno, head of research at CryptoQuant, to discuss what the supply growth means for Ethereum investors. Moreno explained that the Dencun upgrade’s fee reduction effect had structurally changed the supply equation, potentially killing the “ultra-sound money” narrative that had become central to Ethereum’s investment thesis.
The timing of the discussion was significant. Ethereum was already under selling pressure from the broader market correction, and the supply narrative added fundamental weight to the bearish case. For investors who had allocated to ETH partly on the basis of its deflationary properties, the realization that those properties were conditional rather than permanent prompted difficult portfolio reassessments.
Regulatory and Structural Implications
The supply dynamic has implications beyond price action. Regulators evaluating Ethereum-based financial products — including the recently launched Hong Kong spot ETH ETFs — must contend with an asset whose monetary properties can shift materially based on protocol-level decisions. This introduces a layer of complexity that Bitcoin, with its fixed 21-million supply cap, simply does not have.
Indeed, the Hong Kong ETFs were already under scrutiny on May 13, as the six spot Bitcoin and Ethereum funds suffered a combined $39.3 million in net outflows according to Farside Investors. While the outflows were driven by multiple factors, the concurrent discussion about ETH’s inflationary supply likely contributed to the negative sentiment surrounding the Ethereum-specific products.
For the Commodity Futures Trading Commission and the Securities and Exchange Commission, both of which are grappling with how to classify and regulate digital assets, Ethereum’s mutable monetary policy strengthens the argument that it behaves differently from Bitcoin and may warrant a distinct regulatory approach. The ongoing debate around the Financial Innovation and Technology for the 21st Century Act (FIT21), which was working its way through Congress at this time, hinges partly on these distinctions.
What This Means for the Ultra-Sound Money Thesis
The “ultra-sound money” narrative was always more marketing than mathematics. Ethereum’s supply trajectory depends on network activity levels, gas prices, and protocol upgrade decisions — none of which are guaranteed to remain constant. The Dencun upgrade simply exposed this reality in dramatic fashion.
Going forward, Ethereum’s supply will likely oscillate between inflationary and deflationary periods depending on market conditions. During bull markets, when on-chain activity surges and gas prices spike, EIP-1559 burns may outpace staking issuance, returning ETH to deflationary territory. During quieter periods — particularly after fee-reducing upgrades — the inflationary bias reasserts itself.
This cyclicality doesn’t necessarily undermine Ethereum’s value proposition as a programmable blockchain platform, but it does require investors to adjust their mental models. ETH is not “digital gold” with a fixed supply ceiling. It’s closer to a productive asset whose supply responds to network usage — more akin to a central bank that adjusts monetary policy based on economic activity than to a gold mine with finite reserves.
Why This Matters
Ethereum’s inflationary turn is a reminder that protocol upgrades can have second-order effects that fundamentally alter an asset’s investment characteristics. For the crypto industry, it underscores the importance of understanding that monetary policy in blockchain networks is not immutable — it evolves with each hard fork and each governance decision. For regulators, it adds another dimension to the already complex task of creating appropriate frameworks for digital assets. And for investors, it’s a wake-up call that the narratives driving crypto valuations can shift quickly when the underlying data changes direction.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Cryptocurrency investments carry significant risk, including the potential for total loss. Prices mentioned reflect historical data and may not represent current market conditions. Always conduct your own research before making investment decisions.
dencun succeeding at reducing L2 fees but killing the ETH burn. the ultra-sound money narrative was always fragile
laserbeam Dencun reducing L2 fees 4x which means less ETH burned. the ultra sound money thesis was always dependent on high L1 activity
laserbeam Dencun cut L2 fees 4x which is great for users but the tradeoff was always the burn. vitalik acknowledged this tension and people pretended it didnt exist
Dencun cut L2 fees by 4x which means 4x less ETH burned via EIP-1559. the ultra sound money crowd went real quiet after this data dropped
Dencun cut L2 fees 4x which killed the EIP-1559 burn rate. ultra sound money narrative lasted exactly 19 months before supply went inflationary again
dencun_burn_rate_ lasted 19 months. the merge to ultrasound money pipeline was always going to break the second L2 fees dropped. you cant have both
ETH supply growing at fastest rate since the merge. the deflationary thesis is on pause until L1 activity picks back up
Diego ETH supply growing fastest since the Merge. the deflationary narrative needs L1 usage to return. L2s are cannibalizing their own burn
Lucia Moreno L2s cannibalizing the burn is the exact tradeoff vitalik warned about and everyone ignored. you cant have cheap L2 fees AND a deflationary asset
CNBC having julio moreno on to discuss ETH inflation is significant. mainstream media picking up on the supply dynamics
ETH at 2949 down 8 percent on the week while supply goes inflationary. the triple point thesis from Bankless is dead and nobody wants to admit it
ETH at 2949 down 8 pct on the week while supply goes inflationary. the bankless triple point thesis aged like milk
Pavel R. just rename the podcast to deflationary-ish money at this point. the thesis had 47 caveats and zero of them aged well
ETH down 7.89% while BTC only dipped 0.41%. the market is punishing ETH for the broken burn mechanism
SatoshiSam ETH down 7.89% vs BTC at 0.41%. the market is specifically punishing ETH for the broken burn mechanism not just general weakness
SatoshiSam ETH down 7.89% vs BTC 0.41% isnt just the burn breaking. its the market realizing L2s are eating L1 revenue while diluting the supply. double hit
burn_rate_ ETH down 7.89% while BTC barely moved. market figured out the burn is structurally broken not cyclical
Julio Moreno on CNBC talking about ETH inflation is when the narrative officially died. mainstream picked the worst time to notice
Dencun cut L2 fees by 4x which is great for users but it also cut the burn by 4x. vitalik picked adoption over sound money and that is a real tradeoff not a bug
Julio Moreno on CNBC explaining ETH supply growth was the moment the ultrasound money narrative died publicly. bankless couldnt spin it because the data was on a chart everyone could read
ETH at $2,949 down 7.89% while julio moreno from cryptoquant confirmed the supply growth. the post-merge deflationary thesis needs a bull market to work
Julio Moreno going on CNBC to explain ETH supply growth is when the mainstream finally caught on. the ultrasound crowd had no response prepared
Annika T. the bankless pivot to restaking yields was transparent. when the burn thesis died they needed a new bull case. restaking yield is just staking yield with extra slashing risk and nobody called it out
Annika T. the ultrasound crowd response was basically fingers in ears. Bankless pivoted to talking about restaking yields instead of supply dynamics. convenient topic change
the real question nobody asks: if L2s are cannibalizing the burn, what happens when blob fees go to zero? the supply growth rate accelerates further. there is no equilibrium without sustained L1 congestion
Sora H. blob fees going to zero accelerates the supply growth but the real problem is there is no steady state. L2 blob demand needs to scale faster than L1 gas usage declines or the burn never recovers