Latest / The Cryptocurrency Economy with Fexingo: Bitcoin, Ethereum, and Digital Money Markets / Ethereums Fee Burn Is Changing the Supply Math Again
Transcript
- Lucas: So Ethereum is up more than ten percent over the past five days, trading around seventeen eighty-two as of this evening. And I think a lot of the commentary is focused on the broad crypto rally — Bitcoin up four point seven percent, Solana up four point seven, Cardano up twenty-three percent. But there's something structural happening under the hood with Ether specifically that I don't think is getting enough attention. Luna: You're talking about the fee burn, right? Because I've been looking at the on-chain data and the amount of Ether being destroyed through EIP-1559 base fees has picked up noticeably in the last week. Lucas: Exactly. And it's not just a blip. If you look at the seven-day average of daily Ether burned, it's running at about fifteen hundred to two thousand Ether per day, depending on network congestion. That might not sound like a lot compared to the total supply of about one hundred twenty million Ether, but when you compare it to the daily issuance from staking and mining — which is roughly two thousand eight hundred Ether per day — the net supply is actually turning negative on some days. Luna: So we're seeing periods where more Ether is being burned than created. That's deflationary. And that's a pretty big deal for a crypto asset that's historically been seen as inflationary. Lucas: Right. And this is the core of the EIP-1559 mechanism that went live back in August 2021. Every transaction on Ethereum pays a base fee that is burned — permanently removed from circulation. That base fee fluctuates based on network demand. When the network is busy, the base fee goes up, more Ether gets burned. When it's quiet, the burn drops. What we're seeing in July 2026 is a sustained level of activity — partly driven by layer-2 activity settling back to mainnet, partly by some DeFi protocols seeing renewed usage — and it's pushing the burn rate above the issuance rate for the first time in months. Luna: And issuance itself has been dropping too, because of the transition to proof of stake. Miners used to get about thirteen thousand Ether per day. Now validators get around two thousand eight hundred. So the combined effect is a much lower baseline issuance, which means any uptick in burn has an outsized impact on net supply. Lucas: That's the key insight. Pre-merge, you would have needed to burn something like ten thousand Ether per day just to break even on supply. Now the breakeven is around twenty-eight hundred. And we're consistently in that range on busy days. On July third, for example, over three thousand Ether was burned, making that day net deflationary by about two hundred Ether. Luna: So for someone holding Ether, the supply dynamic is shifting from 'constantly diluting' to 'potentially shrinking.' That changes the investment narrative quite a bit compared to Bitcoin's fixed twenty-one million cap. Lucas: It does. And I think the market is starting to price that in. Look at the ETH/BTC ratio — it's been grinding higher over the past week, even as Bitcoin itself is rallying. That's a sign that Ether is outperforming on a relative basis, and the supply story is part of it. But there's a nuance here, Luna: the burn is variable. It depends on network usage. So if a bunch of layer-2 activity moves off-chain permanently or if DeFi activity cools off, the burn could drop and the net supply could go back to being inflationary. Luna: Right, it's not a guarantee like Bitcoin's hard cap. It's more of a dynamic equilibrium. But the direction of travel seems positive — more activity, more burn, less supply. And staking adds another layer: validators are earning yield, but they're also locking up supply, which reduces circulating float. Lucas: Exactly. The staking yield is currently around three point two percent annualized, and about twenty-seven percent of all Ether is staked. That's a huge chunk of supply that's not actively trading. So between the staked supply being locked and the burn reducing net issuance, the amount of liquid Ether available to the market is actually shrinking over time. That's a pretty powerful tailwind if demand stays steady or grows. Luna: I want to push back a little, though. Some critics argue that the burn is just a fee — it doesn't create value for holders, it just reduces supply. And the value of Ethereum comes from its utility, not from supply scarcity alone. Lucas: That's fair. And I'd agree that utility is the primary driver. But supply mechanics do matter for price discovery, especially in a market that's still maturing. If you have a growing user base and a shrinking supply, basic economics says price should reflect that over time. The question is whether the growth in usage can sustain the burn rate. Luna: And that's where the data gets interesting. We've seen a surge in activity on layer-2s like Arbitrum and Optimism, but those transactions eventually settle on mainnet and contribute to the burn. So the burn is actually capturing value from the entire ecosystem, not just mainnet DeFi. Lucas: That's a great point. The burn is a reflection of total economic activity, including all the layers built on top. And as those layers grow, the burn should grow with them. We're already seeing that in the data: the seven-day average burn is about thirty percent higher than it was a month ago. If that trend continues, we could see sustained net deflation by the end of this quarter. Luna: And if that happens, it would be a first for Ethereum — a sustained period where supply is actually contracting. That's a milestone worth watching. Lucas: Speaking of things worth watching — and this is a bit of a side thought — a couple of dollars a month from listeners is genuinely what keeps shows like this going. If walking through the economics of crypto with us has made something click for you, we'd really appreciate you tossing a few bucks our way. It's buy me a coffee dot com slash fexingo, all lower case. That kind of support helps us keep the podcast ad-free and focused on the numbers. Luna: Yeah, it really does make a difference. Even small amounts add up and let us spend more time digging into topics like this fee burn data instead of chasing ad revenue. So if you're able, we'd be grateful. Lucas: Alright, back to the supply math. So we've established that the burn is picking up and that net supply could go negative. But there's another factor that I think is underappreciated: the impact of blob fees from EIP-4844. Proto-danksharding introduced these blob-carrying transactions that have their own fee market, and those fees are also partially burned. That adds another channel for supply reduction that didn't exist before the Dencun upgrade. Luna: Right, blob fees. So far they've been relatively small compared to the base fee burn, but as more layer-2s adopt blob transactions, that could become a meaningful contributor. It's like an additional revenue stream for the network that goes straight to the burn mechanism. Lucas: Exactly. And the beauty of it is that it scales with usage. More layer-2 activity means more blobs, more fees, more burn. So the network's security and supply dynamics are directly tied to its adoption. That's a very different model from Bitcoin, where security comes from block rewards that are fixed regardless of usage. Luna: So if you're comparing the two as stores of value, Bitcoin relies on absolute scarcity and a fixed issuance schedule, while Ethereum relies on a variable supply that could actually become more scarce during periods of high demand. Both have their risks, but the Ethereum model seems more aligned with network growth. Lucas: I think that's a fair characterization. And it's why the fee burn data is so important to track. It's not just a curiosity — it's a fundamental part of the asset's monetary policy. And right now, that policy is trending in a direction that's favorable for holders. But we should also note the risks: if network activity drops off, the burn falls, and supply inflation returns. So it's not a one-way bet. Luna: And there's also the question of what happens when Ethereum's total supply eventually reaches a point where staking rewards become insufficient to secure the network. But that's a longer-term concern. For now, the supply math is looking increasingly bullish. Lucas: Let's bring it back to the price action. Ether at seventeen eighty-two is still well below its all-time high of around forty-eight hundred, but the structure of this rally feels different. It's not just speculation — it's backed by on-chain fundamentals. The burn is real, staking is growing, and the ecosystem is expanding. That's a more sustainable foundation than the 2021 mania. Luna: So the takeaway for listeners: keep an eye on the daily burn vs. issuance data. Sites like Ultrasound Money and Watch the Burn track this in real time. If the net supply continues to contract, it could be a signal that Ether's price has more room to run, even in a choppy macro environment. Lucas: And that's the kind of specific, actionable insight we try to bring. Thanks for sticking with us through the numbers. We'll be back tomorrow with another angle on what's moving in crypto.