Crypto Has An Inflation Problem

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‘Token bloat’ is back in the news with Ethereum taking heat for letting its Layer-2 networks issue tokens without regard for transaction volumes.

There’s a name for it when you top-up a money supply to accommodate more users: inflation. Crypto experts say it’s devaluing tokens while destabilizing the blockchains they live on.

Ethereum took a big deflationary step in 2022 when it moved to proof-of-stake (PoS). Now the issue has flared up again, and competitors see an opportunity. Solana, Celestia, and NEAR are all moving to tame token bloat and close the growing gap between prices and usage on their networks.

Shrinking token supply will enhance asset value, improve network stability, attract investors – and ease speculative selling pressure – or so the thinking goes.

Is inflation fighting the key to blockchain leadership?

When token issuance goes unchecked

Crypto VC Nic Carter took to X recently to lambaste the Ethereum community's passive acceptance of unchecked token creation on Layer-2 networks. ETH, he said, was "being buried in an avalanche of its own tokens. Killed by its own hand."

Carter was replying to a bleak assessment by Lekker Capital founder Quinn Thompson, who posted that Ethereum was "completely dead" in investment terms.

Thompson detailed the number two blockchain’s declining transaction activity, reduced user growth, and sliding revenues. Regardless of its utility as a development platform, he believed the investment case for Ethereum had evaporated.

In light of ETH's recent rally, that may seem overheated. But the criticisms clearly struck a nerve.

What causes token bloat?

Token inflation happens when an issuer increases the supply of tokens in the market. It literally means creating more out of thin air – something crypto enthusiasts typically criticize when central banks do the same with fiat money.

It happens through different mechanisms, such as fulfilling staking rewards or simply issuing more tokens as a way to pay miners and validators.

The last one is crucial. At the time of Carter's intervention, Ethereum network activity had sunk to new lows, with just 53.05 ETH (or roughly $105,000) "burned" a few days earlier on March 23.

That was the lowest daily total since Ethereum introduced its fee-burning mechanism under EIP-1559 in 2022, a move designed to control ETH supply by burning the base fee in each transaction.

When network activity is high, the EIP-1559 mechanism can trigger Ethereum deflation. However, the latest data point to the opposite. Metrics like daily trading volume, active addresses, transaction accounts, and new address creation have all seen drops in the first half of 2025. As a result, Ethereum's supply is on track to grow by about 0.70% annually.

L1s Get the Message

Ethereum hasn't tried to address inflation with recent changes to monetary policy or new measures in the upcoming Fusaka hard fork, but in fairness to the Foundation, it has already reduced the ETH inflation rate by about ~90% since the move to proof-of-stake (PoS) consensus. It had the equivalent deflationary effect of three Bitcoin halvings.

Its recent tear-up of the price charts suggests the change has paid dividends, though Ether's previous price trajectory has. diverged from BTC since 2023.

Concerns about Ethereum token bloat aren't unfounded. Inflating supply without a corresponding rise in usage is unsustainable. As the gap widens, sell-side pressure grows along with the potential for higher volatility.

Competitors have noted the pinch Ethereum is in and are now reassessing their token inflation strategies.

• NEAR Protocol is considering a stakeholder proposal to cut its annual inflation rate in half by reducing the net issuance of NEAR tokens as block rewards to validators and stakers. The project says inflation would drop under this scenario from 5% to 2.5%.
• Celestia is planning a major overhaul of its consensus mechanism, shifting from PoS to what it calls proof-of-governance (PoG). PoG would phase out inflationary techniques like liquid staking and replace them with "off-chain governance," measures like handpicking validators and paying them a flat rate.
• Solana has also made attempts to reduce inflation for SOL, though its recent SIMD-228 proposal, which aimed to drop inflation from around 4.4% annually to 1%, failed to gain assent. A new anti-inflation proposal is now in the works.

Feel the Burn

The tried & true way to cut token supply is burning – e.g. permanently removing tokens the more a chain is used. NEAR, Celestia, and Solana say the level of fee burning on their networks is too low.

Peer networks like Avalanche and BNB Chain are often cited as having well-aligned inflation and burning strategies.

Avalanche burns 100% of its C-Chain transaction fees, offsetting about 16% of AVAX token issuance. BNB Chain executes scheduled quarterly burns. The most recent on July 10, 2025, eliminated a total of 1,595,599 BNB tokens, with an approximate total value of over $1 billion.

According to BNB Burn's dashboards, BNB's burning schedule has cut the net supply down from 202 million at its initial token generation event to approximately 139 million today.

The Take Away

Blockchains often inflate token supply to pay their miners/validators – ironic, given how much contempt crypto has for fiat currencies and the manipulations of central bankers.

Inflating supply may be necessary to support growth, but misalignment hurts networks and their users. An analysis by Crypto.com shows that the more a token is subject to inflation, the worse its price performance.

Experts say better management of token scarcity can push up prices and create a more stable environment for network growth. For all crypto's claims of exceptionalism, it can't escape the basic rules of supply and demand.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.