Researchers at CryptoQuant, a cryptanalysis platform, are now refuting the idea that ethereum is “ultrasonic money,” especially after activating the long-awaited Dencun Update in mid-March.
Analysts note that the hard fork has reduced the number of coins going into the “oven.” Consequently, eth is now more deflationary, considering the increase in daily supply in recent weeks.
Dencun's impact on gas rates
Analysts say the Dencun update was one of the biggest updates after The Merge. With Dencun, ethereum developers introduced proto-danksharding for more efficient and cheaper transaction processing, especially on layer 2 platforms like Arbitrum.
In addition to helping reduce gas rates for Layer 2 solutions, the upgrade improved core network scalability. Consequently, the primary layer could handle more transactions without congestion or increased gas fees.
Although Layer 2 gas rates have fallen dramatically, activity on Arbitrum, Optimism and Base has seen more activity. However, the issue with lower gas fees from layer 2 transactions, which are pooled and confirmed on the mainnet, means that ethereum is now raising fewer coins.
As such, eth is gradually turning into inflation after months of supply reduction, reflecting the adoption of mainnet and off-chain solutions.
The speed at which eth became deflationary before Dencun meant that the “ultrasonic money” narrative was valid. Due to rapidly falling supply, eth, like btc or gold, could become a store of value.
ethereum is becoming inflationary: study
However, CryptoQuant data now paints a worrying picture. A report found that reducing gas fees from layer 2 platforms translates into less eth being withdrawn from the supply.
This “structural change” that the researchers discovered means that the supply of eth is no longer declining as rapidly as before. In their evaluation, they noted that in recent days, the eth supply has been growing at the fastest daily rate since the Merger.
At this rate, if the eth burn rate continues to decline, ethereum may no longer be on track to become deflationary. It will be especially so if activity shifts, as has been the case, to competitive, scalable, low-rate networks such as Solana and Avalanche.
Falling ethereum and bitcoin prices will further exacerbate the burn rate. Whenever prices crash, on-chain activity tends to contract dramatically over time.
Featured image from Canva, TradingView chart
