As a researcher with a background in blockchain technology and experience in analyzing Ethereum’s development, I have closely followed the evolution of Ethereum’s monetary policy and its alignment with the deflationary or ultrasound money narrative.
As an analyst, I’ve observed over the years how Ethereum was frequently described as a deflationary network by analysts and developers, drawing parallels with Bitcoin‘s “sound money” principle. However, following the latest upgrade to the Ethereum network, this perspective appears to have shifted.
According to the latest weekly analysis from CryptoQuant, the Ethereum network stopped exhibiting deflationary traits following the Denmei upgrade in March. This update significantly decreased Ethereum’s transaction fees.
The Ultrasound Money Narrative
The “ultrasound money” concept associated with Ethereum describes the platform as one that safeguards its value against inflation and price erosion in the long run. In contrast to Bitcoin, this narrative implies that Ethereum could offer a more robust monetary system by not only preserving purchasing power but also decreasing the circulation supply of its native token, Ether (ETH), gradually over time.
For nearly a decade, Ethereum has undergone multiple enhancements to maintain a decreasing inflation rate by controlling the generation of new ETH units.
In August 2021, the London update for Ethereum was launched, incorporating a feature that incinerated a certain amount of Ethereum gas fees with each transaction. This mechanism put downward pressure on the Ethereum supply by removing ETH from circulation, thereby increasing its scarcity and value over time.
In September 2022, developers carried out the Merge operation, shifting Ethereum from a mining-based system to one that relies on proof-of-stake. Consequently, new ETH coins were no longer distributed as rewards for mined blocks, leading to a significant decrease in the creation and subsequent inflation of the cryptocurrency.
These two upgrades had deflationary effects on Ethereum until Dencun came along.
Ethereum is No Longer Deflationary
Dencun made significant strides in Ethereum layer-2 chains by decreasing transaction fees and introducing danksharding. This innovation enables the storage of extra data in blobs, leading to a more streamlined and cost-effective network.
Prior to the Dencun upgrade, there was a direct relationship between increased Ethereum network activity and the quantity of fees being burned. This was due to the faster reduction of Ethereum supply as more fees were incurred. However, the recent decrease in network fees has significantly reduced the amount of ETH being burned despite high levels of activity.
As a researcher studying Ethereum’s economics, I’ve noticed an intriguing development in the network’s supply dynamics. The daily issuance of new ETH has turned positive once again, reaching its highest rate since the Merge event. Conversely, the amount of fees being burned has taken a sharp downturn. This shift implies that Ethereum is no longer operating under deflationary conditions.
Based on the current network activity level, Ethereum is unlikely to become deflationary once more, according to CryptoQuant’s analysis. The idea of Ethereum being “ultra sound” money has likely lost its appeal or would require significantly greater network activity to revive.
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2024-05-10 18:45