Bitrabo Editorial
A recent analysis by CryptoQuant, a platform for crypto analytics, has cast doubt on the notion that Ethereum is considered “ultra-sound money,” particularly after the implementation of the highly anticipated Dencun Upgrade in mid-March.
Experts have noted a decrease in the number of coins being sent to the “furnace” following the hard fork, causing Ethereum (ETH) to become more deflationary despite an increase in daily supply in recent weeks.
Impact of Dencun Upgrade on Gas Fees
Analysts suggest that the Dencun Upgrade stands as one of the significant updates post The Merge. This upgrade introduced proto-danksharding for more efficient and cost-effective transaction processing, particularly benefiting layer-2 platforms like Arbitrum.
Besides reducing gas fees for layer-2 solutions, the update also improved the scalability of the mainnet, enabling the primary layer to handle more transactions without congestion or sudden spikes in gas fees.
Although gas fees for layer-2 transactions have significantly decreased, platforms such as Arbitrum, Optimism, and Base have shown increased activity. However, the issue arises from lower gas fees related to layer-2 transactions that eventually get bundled and confirmed on the mainnet, resulting in Ethereum producing fewer coins.
Consequently, ETH is gradually shifting towards inflation after months of supply decline, signaling the adoption of the mainnet alongside off-chain solutions.
Prior to Dencun, the rapid reduction in supply made the “ultra-sound money” narrative plausible. With the diminishing supply, ETH appeared to have the potential to become a store of value akin to BTC or gold.
Ethereum Witnessing Inflation: Research Findings
However, recent data from CryptoQuant paint a different picture. A study revealed that the decrease in gas fees from layer-2 platforms results in less ETH being withdrawn from circulation.
This identified “structural shift” implies that the rate of ETH supply reduction has slowed down. Researchers observed that ETH supply has been growing at the fastest daily rate post The Merge.
If the current trend persists and the rate of ETH burning continues to decline, Ethereum may veer off the deflationary path, especially with activity shifting towards low-fee and scalable networks like Solana and Avalanche.
Additionally, a decline in Ethereum and Bitcoin prices could further impact the burn rate. Drops in prices often lead to a contraction in on-chain activity over time.