Exploring Ethereum’s Deflationary Status Post-Upgrade
As a crypto enthusiast, it is crucial to stay updated on the latest developments and upgrades in the cryptocurrency space. One of the key narratives surrounding Ethereum has been its status as a deflationary network, akin to sound money principles like Bitcoin. However, recent analyses point to a shift in this narrative following the Dencun upgrade implemented on the Ethereum network earlier this year.
- The Ultrasound Money Concept:
- Understand the concept of ultrasound money and how it has been associated with Ethereum.
- Learn how Ethereum aimed to maintain its purchasing power and resist inflation.
- Compare Ethereum’s ultrasound money narrative with Bitcoin’s sound money principles.
The Ultrasound Money Narrative
When we delve into the ultrasound money narrative, we discover that Ethereum has been positioned as a network capable of retaining its purchasing power over time and immune to inflation. This concept sets Ethereum apart from traditional currencies by suggesting that it can not only preserve buying power but also reduce the overall supply of its native token, ether (ETH), over the long term.
- Evolution of Ethereum:
- Explore the evolution of Ethereum over its nine-year history.
- Understand how various upgrades aimed to curb inflationary pressures on the network.
Throughout its existence, Ethereum has undergone several upgrades to address its inflationary characteristics and decrease the issuance rate of new ETH tokens. For instance, the London upgrade, introduced in August 2021, implemented a mechanism to burn a portion of Ethereum’s gas fees, effectively reducing the circulating supply of ETH with each transaction and exerting deflationary pressure on the token.
- The Impact of Recent Upgrades:
- Learn how the London upgrade and the Merge affected Ethereum’s deflationary status.
- Understand the implications of the Dencun upgrade on Ethereum’s supply dynamics.
Another significant upgrade was the Merge, which shifted Ethereum from a proof-of-work to a proof-of-stake consensus mechanism. This transition eliminated the issuance of new ETH as block rewards for miners, effectively reducing the inflation rate of the cryptocurrency. While these upgrades initially had deflationary effects on Ethereum, the scenario changed with the introduction of the Dencun upgrade.
Ethereum is No Longer Deflationary
The Dencun upgrade brought about a reduction in transaction fees on Ethereum’s layer-2 chains and introduced danksharding, a feature that enhanced network efficiency and reduced costs. Prior to this upgrade, the amount of fees burned on Ethereum was directly linked to network activity levels, leading to a faster reduction in ETH supply and increased fee burning. However, the decrease in network fees post-Dencun has resulted in a significant drop in ETH burning despite continued high network activity.
- The Changing Narrative:
- Understand the implications of Ethereum no longer being deflationary.
- Explore how increased network activity could potentially revive the ultrasound money narrative.
As a result, Ethereum’s supply dynamics have shifted, with the issuance of new ETH becoming positive once again, reaching its highest daily rate since the Merge, while the amount of fees burned has substantially declined. Consequently, Ethereum’s status as a deflationary network has been called into question, signaling a departure from its previous ultrasound money narrative.
“We conclude that, at the current rate of network activity, Ethereum will not be deflationary again, the narrative of ‘Ultrasound’ money has probably died or would need much higher network activity to come back to life,” as stated by CryptoQuant.
Hot Take: Reflecting on Ethereum’s Evolution
In conclusion, the evolution of Ethereum’s supply dynamics post-major upgrades highlights the nuanced nature of blockchain networks and their ability to adapt over time. While the ultrasound money narrative was a defining feature of Ethereum, recent developments indicate a shift in this narrative. As a crypto enthusiast, it is essential to remain vigilant of such changes and understand the implications they may have on the broader cryptocurrency ecosystem.
Sources:
1. https://cryptoquant.com/insights/research
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