Ethereum Supply Shortage Ahead of Shanghai Update

The available supply of Ethereum (ETH) on crypto exchanges has plummeted 37% since the Merge upgrade. Now, as the Merge enters its next phase, this scarcity is being taken as a bullish indicator by crypto traders.

The second-largest cryptocurrency by market cap was upgraded from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus method in September 2022. Over the six months since this major overhaul, the supply of Ether on exchanges has been in steady decline.

Santiment, a crypto analytics firm, shared on-chain data showing that there was 19.12 million ETH (worth $31.3 billion) available on exchanges in September before the Merge. Now, there is only 13.36 million ETH (around $19.7 billion). That works out to 37% less ETH on exchanges, and the supply continues to fall. This is exciting news for Ethereum bulls, as the resulting scarcity means that there is less ETH available for trading, making each token more valuable individually.

Ethereum supply on exchanges. Source: Santiment

What's happening to the ETH supply?

One big reason why Ethereum is being withdrawn from exchanges is for staking purposes. The Merge upgraded Ethereum to a new PoS system, so more users are using ETH for this purpose rather than trading. To become a validator on the Ethereum network, users need to lock in 32 ETH, which will allow them to earn rewards by performing validation tasks from their node.

Immediately following the Merge, Ethereum stakers were not allowed to withdraw their staked ETH from the Beacon Chain (where about 16 million ETH, or 14% of the total supply, is currently locked up).

But the Shanghai upgrade, scheduled to roll out in March, is set to change that. Shanghai is a hard fork to Ethereum that will bring a host of long-awaited improvements to the network and, most importantly, allow stakers and validators to withdraw their staked ETH from the Beacon Chain.

Another reason why ETH supply is in decline is Ethereum's (relatively) new deflationary model, which was introduced in the London update back in August 2021. This deflationary mechanism is provided via a fee-burning mechanism, which burned 2.9 million ETH (worth around $4.5 billion today) since the London upgrade rolled out.

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