For years, analysts and developers have promoted Ethereum as a deflationary network, described the blockchain as ultrasound, and argued that it is consistent with Bitcoin's sound monetary principles. However, things seem to have changed with the latest network upgrades.
Analysts at CryptoQuant revealed in their latest weekly report that Ethereum is no longer a deflationary network following the Dencun upgrade (implemented in March) that significantly lowers blockchain transaction fees.
The story of ultrasound money
Ethereum's ultrasonic money story refers to the network as a system that maintains purchasing power over time and withstands inflation. The term refers to the potential for Ethereum to not only maintain purchasing power, but also to remain more healthy, by reducing the supply of the network's token, Ether (ETH), over time, compared to Bitcoin. suggests that there is.
In the nine years of its existence, Ethereum has undergone several upgrades to keep inflation rates low and the issuance of new ETH.
The London upgrade in August 2021 introduced a mechanism to burn a portion of Ethereum's gas fees, removing ETH from circulation with every transaction. This upgrade put deflationary pressure on the supply of ETH, increasing its value and scarcity over time.
In September 2022, developers implemented a merge, moving Ethereum from a proof-of-work network to a proof-of-stake network. Blockchains stopped issuing new ETH as block rewards to miners, and crypto asset issuance and inflation rates decreased significantly.
Until Dencun came along, these two upgrades had a deflationary effect on Ethereum.
Ethereum is no longer deflationary
Dencun reduced transaction fees on the Ethereum Layer 2 chain and introduced dank sharding, which allows additional data to be stored in BLOBs, making the network more efficient and cheaper.
Before the Dencun upgrade, the amount of fees spent on Ethereum was positively correlated with higher network activity. ETH supply decreased faster and more fees were consumed due to increased network activity. However, due to the reduction in network fees, ETH consumption has decreased despite the high activity.
New supply of ETH has turned positive again, increasing to the highest daily rate since the merger, while fee burn has decreased significantly. Therefore, Ethereum is no longer deflationary.
“At the current rate of network activity, we conclude that Ethereum will not fall into deflation again and that the 'ultra-healthy' money narrative is probably dead or will require even more sophisticated network activity to revive. Cryptoquant said.
