Ethereum ‘Ultrasound Money’ Pivot Did Not Help ETH Price Beat Bitcoin

Ether (ETH) has dropped roughly 65% against Bitcoin (BTC) since Ethereum’s 2022 shift to Proof-of-Stake (PoS), casting doubt on the network’s “ultrasound money” thesis.

Key takeaways:

ETH/BTC three-day performance chart. Source: TradingView

Ether’s ultrasound money narrative disappoints

The idea behind “ultrasound money” was that Ether would become even scarcer than Bitcoin.

Supporters argued that Ethereum’s 2021 EIP-1559 upgrade, which began burning a portion of transaction fees, combined with the sharp decline in new ETH issuance following the 2022 Merge, would make Ether deflationary over time.

ETH’s new annual supply rate has averaged about -0.19% after the burn mechanism went live in 2021, according to Ultrasound.MONEY.

Ethereum burn and supply growth since the Merge. Source: Ultrasound.MONEY

Since Ethereum’s shift to PoS in 2022, however, ETH supply has grown at an annualized rate of about 0.23%, though lower than Bitcoin’s current annual inflation rate of 0.85%.

Bitcoin annual inflation rate. Source: BitBo.IO

However, Ethereum’s supply growth since the Merge undermines the promises of deflation. ETH turns deflationary only when mainnet activity is sufficient to burn more coins than the network issues to validators.

That condition has weakened. Ethereum’s average transaction fee is about $0.21 in March, down roughly 54% from a year earlier, according to YCharts.

Ethereum average transaction fees. Source: YCharts

Lower fees mean the Ethereum network burns less ETH.

Moreover, most of Ethereum’s activity has moved to cheaper layer-2 networks. L2beat shows rollups handling 926 user operations per second (UOPS) on March 7, compared to just 22.36 on Ethereum’s mainnet.

Ethereum L1 vs rollups daily average UOPS. Source: L2beat

While the shift helps the network scale, it weakens the burn-heavy conditions required to make Ethereum deflationary.