Dencun upgrade reduces fees but turns Ethereum inflationary, challenging its 'ultra-sound' money status.
The Ethereum network recently underwent a significant upgrade known as Dencun, which was aimed at enhancing the efficiency and reducing the costs associated with Layer 2 transactions. However, this upgrade has led to an unexpected consequence: the supply of ether, Ethereum's native cryptocurrency, has started to increase, making it inflationary once again. This development marks a departure from Ethereum's previous characteristic as 'ultra-sound' money, where the supply of ether was expected to decrease over time, potentially increasing its value.
The Dencun upgrade has significantly reduced transaction fees on the Ethereum network by over 90%. While this reduction in fees is beneficial for users conducting transactions, it has led to a decrease in the amount of ether being burned. In the context of Ethereum, 'burning' refers to the process of permanently removing a portion of ether from circulation, typically the transaction fees, to reduce the overall supply. Before the Dencun upgrade, this burning mechanism contributed to Ethereum's deflationary trend, where the total supply of ether was gradually decreasing.
However, post-upgrade, the decrease in transaction fees has resulted in a slower burn rate of ether, reversing the deflationary trend. According to reports by CryptoQuant, this has led to the fastest daily rate of ether supply growth since the Merge, another significant upgrade that Ethereum underwent. The Merge was anticipated to solidify Ethereum's status as 'ultra-sound' money by reducing its energy consumption and further decreasing the supply of ether through burning mechanisms.
The transition from a deflationary to an inflationary currency poses challenges to Ethereum's 'ultra-sound money' narrative. The concept of 'ultra-sound' money is based on the idea that a currency can become more valuable over time as its supply decreases. With Ethereum now issuing more ETH than it burns, this narrative is being questioned.
Analysts from CryptoQuant suggest that for Ethereum to return to its deflationary trend, there would need to be a significant increase in network activity. This increase in activity could potentially lead to higher transaction fees, even if they are reduced compared to pre-upgrade levels, and a subsequent increase in the rate of ether being burned. However, achieving this level of network activity may prove challenging without further enhancements or changes to the Ethereum network.
