Ethereum supply shifts from deflation to turning point: the full picture of supply dynamics two years after the merge

The circulating supply of Ethereum has steadily increased since the historic merge upgrade in 2022. According to the latest data, as of February 2026, the circulating supply has reached approximately 120.7 million ETH, an increase of over 950,000 ETH compared to immediately after the merge. This figure suggests that the Ethereum network, which was once dominated by a deflationary narrative, is entering a new phase in terms of supply.

Building a Deflationary Foundation with the 2022 Merge

The Ethereum merge transitioned the network from proof-of-work to proof-of-stake, with the most significant change being a sharp reduction in issuance. Eliminating the energy-intensive mining process and establishing a staking-based validation system allowed Ethereum to significantly compress the issuance of new ETH.

During this period, the introduction of the transaction fee burning mechanism via EIP-1559 further contributed to a deflationary environment. There were frequent periods when the amount of fees burned exceeded new issuance, even leading to rare instances where the total supply decreased. This deflationary trend became a symbol of Ethereum’s long-term value preservation for many investors.

Returning to Inflation: The Dynamic Supply Mechanism in Action

However, recent statistics indicate a clear shift. When the issuance of new ETH began to surpass the fee burning, the network effectively transitioned into an inflationary phase. The annual inflation rate is currently around 0.23%, a low figure historically, but a definite shift away from deflation expectations.

This change does not signal network decline but rather highlights that Ethereum’s supply mechanism is not fixed; it is a dynamic system responsive to usage. During periods of high transaction demand and high fees, burning surpasses issuance, leading to deflation. Conversely, in quieter market phases with reduced network activity, supply gradually increases. This cycle demonstrates that Ethereum functions as a truly “usage-driven” currency system.

Implications for Market Participants

The shift from deflationary expectations to inflationary trends could influence investors’ valuation of Ethereum. For stakers, the rising inflation rate raises questions about the real value of staking yields.

On the other hand, considering the network’s evolution, the expansion of Layer 2 scaling solutions may gradually reduce on-chain transaction activity. This could further decrease fee burning, potentially increasing inflationary pressures.

In conclusion, Ethereum’s supply trajectory is expected to continue oscillating between deflation and inflation, influenced by market cycles and technological developments. Its core nature as a supply system closely linked to network activity—rather than a fixed supply asset—will likely be key to future price formation and market valuation.