While Ethereum's Layer 2 is at an all-time high in terms of active addresses and transactions, the mainnet may not be doing as well.
What is the impact of L2 on Ethereum's deflationary goal?
Posted on May 15, 2024 at 10:56 AM ET.
Ethereum, often hailed as “super-sound money” for its deflationary tendencies, has turned inflationary again in the past month, calling into question the fundamental principles that the community thought created its value.Recent report CryptoQuant declared the ultrasonic money story over, sparking debate and concerns about ETH tokenomics.
learn more: What is Tokenomics? A Beginner's Guide
The crux of the issue lies in the balance between Ethereum's main chain and Layer 2 scaling solution (L2). Although L2 succeeded in increasing Ethereum's scalability by processing transactions from the main chain, it inadvertently reduced the demand for ETH, Ethereum's native token, on the main chain. This decrease in demand led to lower transaction fees, measured in Gwei, and subsequent ETH burnout. Currently, gwei is around 8, significantly lower than before, and at this level he shows that ETH is far from deflation.
Read more: Why Ethereum gas prices have fallen to their lowest levels since 2020
Ethereum may move from a deflationary state to an inflationary state due to network activity and changes in the balance between the amount of ether burned and issuance.under EIP-1559, when the trading volume is low and the base fee burned is less than the Ether issued in block rewards, the total supply of Ether increases and Ethereum becomes inflationary. This dynamic reflects how the supply of Ethereum is not fixed, but changes depending on network usage, potentially impacting its value and scarcity as it moves from deflationary to inflationary conditions. It shows that there is a gender.
Meanwhile, Ethereum L2 is ripping; process Boasting 10 times more transactions than the main chain, record high on a weekly basis Active address.
Given these levels of gas fees, the question arises as to how much activity would need to occur on L2 for ETH to become deflationary again.
read more: Horizontal scalability is the solution to L2 fragmentation
complex system
Ethereum Foundation researcher Ansgar Dietrichs told Unchained that ETH’s deflationary mechanism is directly tied to market capitalization and the balance between revenue and expenses. At low prices, the burn mechanism can exceed the amount of issuance, leaving ETH in a deflationary state. However, if market capitalization increases and returns do not proportionately keep up, ETH could become inflated.
This bidirectional influence means that not only does market capitalization influence the deflationary or inflationary nature of ETH, but this nature also influences market capitalization through investor perception and behavior.
To reverse this trend and restore ETH from its deflationary state, L2 activity will need to increase significantly. This means more transactions and fees need to be transferred back to the Ethereum main chain to increase ETH burn. However, no studies have been conducted to accurately assess how much activity is required. The Ethereum Foundation did not respond to several emails requesting additional information.
Furthermore, Dietrichs pointed out that due to certain investor preferences, for a given revenue and issuance level, there is one particular equilibrium market capitalization that the market essentially tends towards. As these factors (revenues, issuance, investor preferences) change, this equilibrium market capitalization changes. This dynamic feedback loop demonstrates that meeting deflationary challenges is not simply about adjusting a few parameters, but about understanding and influencing a complex system of interrelated factors. Suggests.
As Ethereum continues to evolve, questions remain: Can the fundamental promise of ultrasonic money be restored, or will Ethereum need to adapt to new economic realities?
learn more: Beginner's guide to the Ethereum layer: data availability, consensus, and execution
