Recently, Ethereum has shown promising signs of recovery amid an otherwise bearish crypto market, mirroring Bitcoin’s minor uptrend and showing subtle indications of improvement.
Even as Ethereum’s price increased slightly by 0.2% over the last 24 hours, a parallel trend which could potentially severely disrupt Ethereum’s economic model has also been developing beneath the surface.
Decrease In Network Activity Leads To Lower Ether Burn
April saw Ethereum reach an all-time low ETH burn rate due to a drop in transaction fees on network transactions.
Fees have typically ranged just under 10 gwei this year; however, recent weeks have witnessed them fall significantly to some of their lowest points; directly impacting how quickly ETH is burned away.
Evidence of this reduced burn rate is evident by its dramatic decline, with daily burned ETH reaching as little as 671 in just the past day – an immense reduction from daily figures between 2,500-3,000 seen earlier in 2018.
Such a decrease is more than mere statistical anomaly – it reflects real shifts within Ethereum network itself.
One key contributor to lower gas fees is the increasing shift of network activities towards Layer 2 solutions, which increase transaction speeds while simultaneously cutting costs.
Innovative features, such as the recent Dencun upgrade of Ethereum with its introduction of blob transactions, have further reduced costs on these secondary layers.
Blobs were initially introduced to Ethereum to enhance compatibility with Layer 2 solutions such as zkSync, Optimism and Arbitrum by efficiently managing data storage needs. They have since been integrated as part of Dencun upgrade which also introduces proto-danksharding via EIP-4844.
Attracting more transaction fees may prove advantageous, yet these technological breakthroughs pose challenges to Ethereum’s deflationary mechanisms.
This upgrade introduced a new fee structure wherein part of every transaction fee, the base fee, is burned – potentially decreasing overall supply ETH by burning. With decreased transaction fees however, anticipated deflationary pressure from burning has softened, possibly signaling a shift toward inflation over the short-term trend.
Ultrasoundmoney reports that Ethereum has experienced mild inflation with an annualized growth rate of 0.498%. However, this could change should network activity increase leading to greater transaction fees and consequently greater burn rates.
Ethereum Market Response
Due to network dynamics, Ethereum’s market price has struggled to regain its former highs above $3,500; currently trading around $3.085. However, recent weeks have witnessed some diminution.
Price behavior highlights how markets respond to both internal network changes and external economic factors like regulatory issues from the Securities Exchange Commission of the US (SEC) as well as macroeconomic uncertainties.
At its core, Ethereum’s gas fees and associated ETH burn rate will play a pivotal role in its long-term sustainability as an economic model. Image from Unsplash; Chart from TradingView
