Ethereum solved its biggest technical problem, scaling to handle far more transactions, but in doing so it dismantled the economic story that made the asset unique. When the network moved activity to cheaper layer 2 networks (L2s) like Arbitrum and Optimism, the mechanism that was supposed to make ETH scarcer and more valuable simply stopped working at scale.

What Was 'Ultrasound Money' and Why Did It Matter?

For about eighteen months, Ethereum had one of crypto's most compelling narratives. In August 2021, the network activated a fee-burning mechanism called EIP-1559, which permanently removed transaction fees from circulation instead of paying them to miners. Then, in September 2022, Ethereum switched from energy-intensive proof-of-work mining to proof-of-stake validation, cutting new ETH issuance by roughly 90 percent.

Combine those two changes, and the math looked powerful: if the network burned more ETH than it created, total supply would shrink over time. A deflationary asset with growing demand should appreciate in value. Ethereum would become "harder money" than Bitcoin, whose supply still grows on a fixed schedule. The community embraced the term "ultrasound money" as a deliberate contrast to Bitcoin's "sound money," and a tracking website called ultrasound.money displayed the supply ticking downward, day by day.

For a window after the Merge in late 2022, it actually happened. Supply fell below its pre-Merge level. Burns outpaced issuance. The narrative was not hype; it was, for that period, an accurate description of the data.

How Did Layer 2 Networks Break the Deflation Story?

The irony is that Ethereum's greatest technical success destroyed its best economic narrative. The network's long-term scaling strategy was to move transactions off the expensive base layer onto layer 2 rollups, which process transactions cheaply and then post compressed data back to Ethereum for security. The base layer would become a settlement and data-availability layer; the rollups would handle the actual activity.

The pivotal moment came in March 2024 with the Dencun upgrade, which introduced EIP-4844, a separate and far cheaper data channel for rollups to post their information. Costs for layer 2s dropped by a factor of 10 to 100. Activity that used to happen on mainnet, paying mainnet fees and burning mainnet ETH, migrated to rollups paying blob fees that were, in practice, close to zero because blob space was massively oversupplied relative to demand.

The effect on the burn was immediate and severe. Before Dencun, Ethereum burned thousands of ETH per day during busy periods. After Dencun, daily burn dropped to as low as 50 to 70 ETH. With issuance running around 1,700 ETH per day and burn collapsing well below that, the equation flipped. By various measures across 2025 and into 2026, net annual inflation ran somewhere between roughly 0.2 percent and 0.8 percent, depending on the window. ETH supply crossed back above its Merge-era level. The deflation was over.

Understanding the Current State of ETH Supply and Inflation

The mechanism that made ultrasound money true, EIP-1559 burning at scale, had not been removed. It had been bypassed. The activity simply moved to a layer where the burn does not happen in any meaningful amount. Ethereum scaled successfully and, in doing so, severed the link between usage and scarcity that the entire thesis depended on.

However, defenders of Ethereum's economic model argue that the situation is more nuanced than a simple failure of the ultrasound thesis. Several counterarguments have emerged:

• Elastic Scarcity Over Fixed Deflation: Ethereum was never designed to deflate forever at a fixed rate. It was designed to burn in proportion to demand, which means it becomes deflationary when the network is busy and mildly inflationary when it is quiet. During periods of high mainnet activity above roughly 16 gwei average gas, burn still exceeds issuance, and ETH still goes net deflationary temporarily.
• Issuance Remains Radically Lower: Even mildly inflationary, Ethereum issues roughly 90 percent less ETH than it did under proof-of-work. Compared to Bitcoin, which currently inflates at around 0.8 percent annually on a fixed schedule, Ethereum's roughly 0.2 percent net inflation in calmer periods is actually lower.
• Staking Reduces Effective Supply Pressure: Roughly 28 to 30 percent of all ETH is locked in staking, earning yield and not circulating. The tradeable float, ETH actually available on exchanges, is meaningfully smaller than the headline supply number, and it shrinks as more ETH is staked.

How Did Ethereum Try to Restore the Burn?

The December 2025 Fusaka upgrade attempted to address the deflation problem by adding EIP-7918, a blob fee floor designed to restore a minimum burn. According to modeling by Fidelity, this change would have added roughly 78.6 million dollars in burn across 93 percent of days since 2024.

The deeper tension, however, remains unresolved. A cheap, scaled Ethereum burns less than a congested, expensive one, so the network's success as infrastructure works against its scarcity as an asset. This creates a fundamental trade-off: the network can be efficient and widely used, or it can maintain the scarcity narrative that made ETH attractive as a store of value, but it struggles to do both simultaneously.

Ways to Think About Ethereum's Evolving Value Proposition

As the ultrasound money narrative fades, Ethereum's defenders have shifted focus to alternative value drivers:

• Settlement and Security Layer: Ethereum's role as a settlement layer for stablecoins, tokenization, and decentralized finance (DeFi) may matter more than deflation. If demand for Ethereum's blockspace grows faster than supply, the asset can appreciate regardless of whether total supply is shrinking.
• Institutional Adoption and ETFs: Spot Ethereum exchange-traded funds (ETFs) have begun attracting significant capital inflows, suggesting that institutional investors view ETH as a core holding independent of the ultrasound thesis. This demand may provide price support even if the supply story changes.
• Conditional Deflation During High Activity: The network can still achieve temporary deflation during periods of genuine congestion on the base layer, preserving at least a conditional version of the ultrasound narrative for peak-demand scenarios.

The story of Ethereum's ultrasound money is ultimately a story about the tension between two competing goals: building a cheap, scalable network that serves billions of users, and creating a scarce asset that appreciates as demand grows. For eighteen months, Ethereum appeared to have solved both problems simultaneously. The reality, it turns out, is messier. Scaling worked. Scarcity did not survive it.