Ethereum’s latest upgrade may have worked a little too well, with undesirable results for long-term Ethereum (ETH) investors.
As advertised, the Dencun hard fork reduced transaction fees by more than 90% on multiple Ethereum layer 2 networks shortly after going live on March 13th. Comparing time periods for similar networks, the median Ethereum transaction fees today are ~4x lower than before Dencun. According to market intelligence platform CryptoQuant, this activity includes:
However, due to the reduction in fees paid by users, the Ethereum network is currently burning through its ETH supply in circulation at the slowest rate since its merger in September 2022. In fact, the burn rate is now so low that ETH has reverted to being an inflationary currency. Periodically issues more units than are consumed within a given period of time.
“We conclude that at the current rate of network activity, Ethereum will not fall into deflation again and that the ‘ultrasonic’ money story is likely dead or will require even more advanced network activity to revive.” CryptoQuant analysts said in a weekly publication. Wednesday research report.
After the merger, “ultrasonic money” became a popular nickname for Ethereum, and the consensus mechanism of the second-largest cryptocurrency by market capitalization changed from proof-of-work to proof-of-stake. With this upgrade, the rate of new ETH issuance has also been reduced by 90%, which is less than what the network consumes in fees.
Ethereum believers have eagerly exploited that fact, proudly defending Bitcoin (BTC) as “sound money” thanks to a fixed supply of 21 million coins. We were hooked. In theory, Ether is currently a good “ultrasonic money” with actively decreasing supply, making it a good long-term store of value.
However, now that the ETH inflation rate has exceeded zero, that argument has disappeared. And the resurgence of network activity may still not be able to bring it back. As CryptoQuant pointed out, fees burned on Ethereum were positively correlated with network activity until Dencun, after which they fell like a rock.
According to open-source dashboard ultrasound.money, Ether's current inflation rate is 0.559% annually, which is still higher than Bitcoin's inflation rate of 0.835% after last month's halving.
Edited by Ryan Ozawa.
