Ether Supply Turns Inflationary for the First Time Since 2022

The Ethereum supply stopped being deflationary after its Dencun upgrade, which made transaction fees cheaper but reduced the rate of Ether being burned. This started discussions about Ethereum moving away from being "ultra sound money." Meanwhile, Coinbase is expanding its decentralized services through Base, with the goal to facilitate Web3 access and streamline KYC procedures. Additionally, tensions between the crypto industry and the U.S. Securities and Exchange Commission (SEC) are still rising, especially when it comes to the SEC’s reclassification of Ether as a security.

Ethereum Sees Supply Increase Post-Dencun

The Ethereum network underwent a major shift after its latest Dencun upgrade. The Ether (ETH) supply stopped being deflationary for the first time since September of 2022. This is a very noticeable departure from the decreasing Ether supply that was seen after the Merge happened, which transitioned Ethereum to a proof-of-stake consensus model and introduced a fee-burning mechanism.

According to data from CryptoQuant, the total supply of Ether increased from 120 million on Mar. 12 to 120.1 million on May 7, two months after the Dencun upgrade went live. This minor increase in supply was the first inflationary period for ETH since the Merge was implemented.

Despite this, the impact on Ethereum’s broader ecosystem may be minimal. Ki Young Ju, the founder and CEO of CryptoQuant, believes that Ethereum's main strengths lie in its decentralized applications (DApps), suggesting that comparing it to Bitcoin’s narrative of sound money might be misplaced.

The "Ultra sound money" narrative for Ethereum refers to a concept inspired by Bitcoin's "sound money" principle, which emphasizes the importance of creating a monetary system that is resistant to inflation and maintains its purchasing power over time.

The Dencun upgrade, while ending the deflationary trend, has made transaction fees on Ethereum up to four times cheaper. On the other hand, this reduction in fees led to a decrease in the amount of Ether being burned, which contributed to the slight increase in its total supply.

Although this change might alter the perception of Ether as "ultra-sound" money, it certainly proves that Ethereum is going through an evolution and it is working on improving user experience and network efficiency.

What is Crypto Inflation and Deflation?

Inflationary and deflationary cryptocurrencies are differentiated by how their supplies change over time, each employing specific mechanisms to manage supply dynamics and network incentives.

Inflationary cryptocurrencies have an increasing supply, where new coins are continuously added to the system. This approach involves a fixed or variable maximum cap on the total number of coins that can be minted, with some cryptocurrencies like Dogecoin (DOGE) choosing to remove their supply caps altogether, leading to an unlimited supply.

The distribution of new coins in these systems typically happens through consensus mechanisms like proof-of-work (PoW) or proof-of-stake (PoS). In PoW systems, like Bitcoin, miners validate transactions and earn coins by solving cryptographic puzzles first. In PoS systems, validators stake their own coins and are chosen to validate new transactions, earning rewards proportionally to their stakes.

Deflationary cryptocurrencies, on the other hand, see their total supply decrease over time through mechanisms like transaction fee burning or direct coin destruction. These tokens mostly have a set deflation rate which dictates the annual percentage decrease in supply.

Deflationary strategies are implemented to enhance scarcity and potentially increase the value of the remaining tokens. Some cryptocurrencies, like Binance Coin (BNB), implement coin burns to reduce their circulating supply systematically. Additionally, events like Bitcoin's "halving" reduce the mining rewards by half about every four years, which ends up constricting the supply even more.

Coinbase’s Vision for Ethereum and USDC

Coinbase is getting ready to cater to a billion customers by integrating decentralized applications across millions of blockchains. At the TokenizeThis 2024 conference in Miami, Coinbase’s head of tokenization, Anthony Bassili, shared the company’s ambitious plan to include Ethereum’s layer-2 Base blockchain.

Base will streamline Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures through an innovative identity attestation process using the Ethereum Attestation service and Coinbase’s verification system, which tags users’ smart wallets post-KYC. Bassili is very confident in the evolution of this system towards a KYC reliance model, which will simplify the KYC process over time. More than 300,000 wallets have already undergone this attestation.

Base will leverage Ethereum Virtual Machine (EVM) networks to give Web3 access for users with attested wallets and verified identities. The ecosystem will be supported by the stablecoin USDC, and after Coinbase's equity stake acquisition in Circle in August, the company now has more than $28 billion in total assets in Circle. Coinbase also has the ability to mint USDC.

Looking ahead, Bassili is optimistic about the potential shift towards trading tokenized assets across various classes directly, without the need to convert them into dollars first. However, he believes that for this to actually happen depends on the development of regulatory frameworks and market structures that are designed with instantaneous identity checks.

Base Season

In its May report, Franklin Templeton declared that "Base Season" has started. The report specifically shed some light on the surge of Social Finance (SocialFi) applications and the fact that Base is now leading its peers in this area. In fact, Base has captured about 46% of SocialFi transactions, allowing it to outpace other networks like BNB Chain and Polygon. Support from Coinbase has certainly helped Base secure almost half of the market share in SocialFi to date.

One of the standout SocialFi applications on Base is Friend.tech, which makes it possible for creators to monetize their content in innovative ways like "key" shares or "tokenized attention." Franklin Templeton not only lauded Base's performance in SocialFi, but also predicted it will continue to be a crucial area for the network's adoption and growth.

In addition to its achievements in SocialFi, Base has also benefited from the recent surge in memecoin popularity. The network saw its total value locked (TVL) soar to $5.4 billion, making it the third-largest Ethereum layer 2 network. In contrast, leading networks like Arbitrum One and OP Mainnet have experienced declines in their TVLs in recent months.

Coinbase, which launched Base in August last year, currently has full control over the network as its sole sequencer. However, plans are in place to gradually decentralize Base. The network is built on Optimism’s OP stack and is tailored to provide a secure, cost-efficient, and builder-friendly environment for Ethereum Virtual Machine-compatible applications.

The SEC’s Stance on Ether

What Ethereum and Base are doing is turning heads in the industry, but not everyone is very happy about this. Joseph Lubin, co-founder of Ethereum and CEO of Consensys, shared some of his concerns at FT Live’s Crypto and Digital Asset Summit in London about the U.S. Securities and Exchange Commission's (SEC) approach to regulation.

Lubin criticized the SEC for its very vague reclassification of Ether as a security and its reliance on enforcement actions rather than transparent rulemaking. He believes this has almost created an environment of fear, uncertainty, and doubt in the industry.

Consensys is suing the SEC after a Wells notice, a move Lubin firmly believes is necessary to get clearer legal guidance, especially considering the fact that the Commodity Futures Trading Commission previously classified Ether as a commodity. He suspects the SEC's timing of its enforcement actions is very strategic as it could be used as a reason to deny Ether spot exchange-traded funds (ETFs).

Lubin also shared his thoughts on the broader implications of the SEC's actions and suggested that it reflects a fear of the transformative potential of decentralized finance. He is also not very happy about the notion promoted by the SEC that platforms like Coinbase and wallets like MetaMask should be treated as broker-dealers.