Ethereum finds itself post-merge, in the middle of a bear market, and with transaction fees trending towards their lowest point in two years. The Merge wasn’t a magic bullet that instantly propelled the ether token price back to all-time highs, and now the community finds itself with little to get excited about in the short-term.

A relentless swarm of ultrasound.money shitposting about changes in supply has followed. I understand the fascination with whether the supply has increased or not; despite it being a purely mental milestone, a deflationary token supply has been promised for over a year and the currently equilibrium is a sadistic tease.

I don’t mean to pick on Sassal because tweets like the one below are widespread in the community, but his is a prominent example. The metrics stating a 95%+ reduction in issuance are generally disingenuous; a lot of it comes down to ultrasound.money formatting the data in a way that many people will interpret inaccurately.

The intricacy that we’re going to discuss here is the distinction between issuance and relative changes in circulating supply.

To understand why this distinction is important we need to step back and look at how burn permeates the token supply, to show why this barrier is inconsequential.

Issuance and Token Supply

Let’s start off with a simplification of how issuance and burn is currently handled in the Ethereum ecosystem.

When you transact using the Ethereum network your transaction fee is comprised of two parts: the base fee and MEV. The base fee algorithmically scales with current network activity and is burned or removed from the circulating token supply. This burn mechanism places deflationary pressure on the token supply.

The portion of transaction fees above the base fee are passed to validators as an added incentive for the validator to include your transaction in their block and maximize their income. This separation helps enable a robust fee market allowing network participants to pay excess premiums in order to get their transactions processed as soon as possible if they are time sensitive.

In order to supplement and stabilize income across validators, the Ethereum protocol mints tokens independent of the transaction and burn processes and pays them to the validator that was randomly assigned to handle the block.

These two forces: issuance and burn, fight a never-ending battle increasing or decreasing the total token supply; they are however, independent. Burn does not affect issuance and taking the sum of the two processes and claiming the quantity as issuance is disingenuous.

Demand for Tokens

Markets are a balance of supply and demand, to get the full picture we also need to look at demand. In this massive qualitative simplification, we’re splitting total demand into two buckets: transactors buying back a share of their transaction fees and a generic net incoming demand term.

I’m not going to attempt to quantify the amount, but transactors on average buy back some share of their transaction fees. It’s not something I do personally, but many entities that interact with mainnet require ether to transact and therefore are required to buy back their transaction fees to continue their operations. In this sense, higher transaction fees induce a higher level of demand for ether tokens.

In a more rigorous study of market dynamics, one would break up the net incoming demand term into sellers looking for exit liquidity and buyers bringing in external money, but we can instead introduce a hysteresis term to handle a lack of short-term dramatic price movements and suggest that in the long-term the net demand quantity is the dominant factor.

The effect of high transaction fees on incoming demand is two pronged: high fees reduce the desire for people to use the network depressing the quantity of money flowing into the system, however in the post-1559 era high transaction fees and the meme of ultra sound money also induces a store-of-value demand impulse.

The increasing scarcity of ether makes for a strong driver of money into the ecosystem when wielded correctly.

Market Dynamic

Combining the supply and demand profiles we create a bridge that in the long-term determines the market price of ether. On the supply side there are validators selling their rewards (most prominently estimated at 50% of rewards by Justin Drake), made up of issuance and MEV, but with no sign of burned tokens.

On the demand side we have burn influencing the dynamic in three ways: higher transaction fees inducing additional gas buybacks, the deflationary token supply inducing store-of-value meme purchases, and high transaction fees decreasing the usability of the network and demand for tokens.

With this framing, token burning is much more of a demand factor than a supply factor. Issuance and burn are not quantities that should be compared 1-to-1 except when speaking in the broadest and clarified of terms.

Focusing on relative changes in supply is a red herring that will lead to disappointment as a decreasing circulating token supply is not a magical solution to pump token prices.