Researchers at CryptoQuant, a crypto analysis platform, are now refute the idea that Ethereum is an “ultra-sound currency”, especially after the activation of the highly anticipated Dencun upgrade in mid-March.
Analysts observe that the hard fork has slowed down the number of parts going into the “oven”. As a result, ETH is now more deflationary, given the increase in daily supply over the past few weeks.
Dencun’s impact on gas fees
Analysts say the Dencun upgrade was one of the major updates after Fusion. With Dencun, Ethereum developers introduced proto-danksharding for more efficient and less expensive transaction processing, especially by layer 2 platforms like Arbitrum.
In addition to helping reduce gas fees for Layer 2 solutions, the update improved core network scalability. As a result, the primary layer could handle more transactions without congestion or increased gas fees.
Although Layer 2 gas fees have decreased significantly, activity on Arbitrum, Optimism, and Base has seen more activity. However, the issue of lower gas fees for layer 2 transactions, which are aggregated and confirmed on the mainnet, means that Ethereum is now minting fewer coins.
As such, ETH is gradually becoming inflationary after months of supply reduction, reflecting the adoption of mainnet and off-chain solutions.
The rate at which ETH became deflationary before Dencun meant that the “ultra-sound money” narrative was valid. Due to the rapid decline in supply, ETH, like BTC or gold, could become a store of value.
Ethereum becomes inflationary: study
However, CryptoQuant data now paints a worrying picture. A report found that decreasing gas fees from layer 2 platforms results in a decrease in ETH taken from supply.
This “structural change” discovered by the researchers means that the supply of ETH is no longer decreasing as quickly as before. In their evaluation, they note that in recent days, the supply of ETH has increased at the fastest daily rate since the merger.
At this rate, if the ETH burn rate continues to decline, Ethereum may no longer be on track to become deflationary. This will be especially the case if activity shifts, as has been the case, to competing low-cost, scalable networks like Solana and Avalanche.
Falling Ethereum and Bitcoin prices will further exacerbate the burn rate. Whenever prices collapse, on-chain activity tends to contract sharply over time.
Featured image from Canva, chart from TradingView
