Key Points
CryptoQuant, a crypto data analysis platform, has challenged the notion that Ethereum is “ultra-sound money”, particularly following the mid-March activation of the Dencun Upgrade.
They note that this hard fork has reduced the rate of coins being burnt, making ETH more inflationary as its daily supply increases.
Dencun Upgrade’s Effect on Gas Fees
The Dencun Upgrade, according to analysts, was a significant update following The Merge.
With this upgrade, Ethereum developers implemented proto-danksharding to improve transaction processing efficiency, especially for layer-2 platforms like Arbitrum.
This update not only lowered gas fees for layer-2 solutions but also enhanced the scalability of the mainnet.
As a result, the primary layer can process more transactions without congestion or spikes in gas fees.
Despite a significant reduction in layer-2 gas fees, platforms like Arbitrum, Optimism, and Base have seen increased activity.
However, the decrease in gas fees from layer-2 transactions, which are bundled and confirmed on the mainnet, means fewer Ethereum coins are being created.
This leads to Ethereum gradually becoming inflationary after months of supply reduction, reflecting the adoption of the mainnet and off-chain solutions.
Prior to Dencun, the rapid rate at which Ethereum was becoming deflationary supported the “ultra-sound money” narrative, suggesting that ETH could become a store of value like Bitcoin or gold due to its rapidly decreasing supply.
Ethereum’s Inflationary Trend: A Study
However, new data from CryptoQuant paints a different picture.
A report found that the decrease in gas fees from layer-2 platforms results in less ETH being removed from the supply.
Researchers have discovered this “structural shift”, indicating that the Ethereum supply is not decreasing as quickly as it used to.
They observed that in recent days, the Ethereum supply has been growing at the fastest daily rate since the Merge.
If the rate of Ethereum burning continues to decrease at this pace, Ethereum may no longer be on track to become deflationary.
This will be particularly true if activity shifts to competing low-fee and scalable networks like Solana and Avalanche.
The burn rate will be further exacerbated by falling Ethereum and Bitcoin prices.
Typically, when prices fall, on-chain activity tends to contract sharply over time.
