Understanding the Changing Supply Dynamics in Ethereum
Supply dynamics in Ethereum have been constantly changing due to the fluctuations in DeFi, NFT sales, and meme coin trading. Depending on the timeframe you look at, Ethereum can either be deflationary or inflationary. In a seven-day model, Ethereum becomes scarcer, while on a yearly basis, it issues more than it burns. So, what is causing these shifts in supply dynamics and what does the future hold for Ethereum?
The Impact of EIP-1559 and the Merge
In August 2021, Ethereum implemented EIP-1559, which introduced a fee-burning mechanism. This mechanism directly connects the supply of Ethereum to gas prices. Higher gas prices result in more ETH being burned, and vice versa. Additionally, the transition from proof-of-work to proof-of-stake through the merge reduced ETH issuance by 90%, leading to the concept of “ultrasound money.”
Declining Gas Prices and Transactional Volume
Currently, transaction fees for sending ETH across the protocol stand at around $0.28. According to Etherscan data, trading on Uniswap costs $2.76, significantly lower than its price in early September. The decline in gas prices can be attributed to three factors.
Factors Contributing to Declining Gas Prices
According to Chris Martin, head of research at Amberdata, the first factor is the Ethereum Foundation’s focus on scaling with Ethereum 2.0. This has made the network cheaper and more secure. The second factor is the growth of Layer-2 solutions, which have taken a significant volume off the mainchain. Lastly, there is a lack of narrative in the broader crypto market, resulting in fewer opportunities compared to 2021.
A Momentary Situation or a Nebulous Future?
Julio Barragan, the director of education at Blocknative, believes that the current gas situation is only temporary. He expects gas prices to increase as volume picks up and competition for block space intensifies. However, predicting the future of Ethereum gas prices is challenging due to factors like the gradual acceptance of ERC-4337 (account abstraction) and further adoption of Layer-2 solutions. Lower fees may attract more users and activity on-chain, but this can also lead to increased congestion.
Hot Take: The Changing Landscape of Ethereum Gas Prices
The supply dynamics in Ethereum have been impacted by various factors, including the implementation of EIP-1559 and the transition to proof-of-stake through the merge. Declining gas prices can be attributed to the focus on scaling with Ethereum 2.0, the growth of Layer-2 solutions, and a lack of narrative in the crypto market. However, it is uncertain how account abstraction and further adoption of Layer-2 solutions will affect gas prices and overall supply in the long term. Lower fees may attract more users but could also lead to congestion on the network.
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