This is why Ethereum is no longer a deflationary network: CryptoQuant

Over the years, analysts and developers have touted ethereum as a deflationary network, presenting the blockchain as an ultrasound, aligning with bitcoin's sound money principle. However, that appears to have changed with the latest network update.

CryptoQuant Analysts revealed In the company's latest weekly report, it is stated that ethereum ceased to be a deflationary network after the Dencun upgrade, implemented in March, which reduced blockchain transaction fees by a substantial amount.

The Ultrasound Money Narrative

ethereum's ultrasonic monetary narrative refers to the network as a system that maintains its purchasing power over time and remains resistant to inflation. Compared to bitcoin, the term suggests that ethereum has the potential to remain stronger by not only preserving purchasing power but reducing the supply of the network token, ether (eth), over time.

In the nine years of its existence, ethereum has implemented several upgrades to support the decline of its inflation rate or the issuance of new eth.

The London update, implemented in August 2021, introduced a mechanism that burned a portion of ethereum's gas fees, removing eth from circulation with each transaction. The upgrade put deflationary pressure on the supply of eth, making it more valuable and scarce over time.

In September 2022, developers implemented Merge, transitioning ethereum from a proof-of-work network to a proof-of-stake network. The blockchain stopped issuing new eth as block rewards to miners, dramatically reducing the issuance and inflation rate of the cryptoasset.

These two upgrades had deflationary effects on ethereum until Dencun appeared.

ethereum is no longer deflationary

Dencun reduced transaction fees on ethereum layer 2 chains and introduced danksharding, which allows additional data to be stored in blobs, making the network more efficient and less expensive.

Prior to the Dencun upgrade, the amount of fees burned on ethereum was positively correlated with increased network activity; eth supply dropped faster and more fees were burned due to increased network activity. However, the reduction in network fees has drastically reduced the amount of eth burned despite the high activity.

New eth supply has turned positive again, rising at its highest daily rate since the Merger, while the amount of fees burned has plummeted significantly. Therefore, ethereum is no longer deflationary.

“We conclude that at the current rate of network activity, ethereum will not become deflationary again, the 'ultra-healthy' money narrative is likely dead, or would need much higher network activity to come back to life,” CryptoQuant stated.

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