In recent weeks, Ethereum has shown subtle signs of recovery amid a generally bearish crypto market, with the altcoin mimicking Bitcoin’s modest uptrend.
Despite Ethereum’s price rising slightly by 0.2% over the past 24 hours, a parallel trend is unfolding beneath the surface that could significantly impact Ethereum’s economic model.
Drop in network activity reduces ETH burning
In April, Ethereum’s ETH burn rate hit a yearly low, mainly due to a significant drop in network transaction fees.
These fees have typically hovered just below 10 gwei this year, but in recent weeks they have fallen to some of the lowest levels, directly impacting the rate at which ETH is burned.
This reduced burn rate is evidenced by the sharp decline in daily ETH burned, which reached a low of 671 ETH over the past day, a notable drop from daily figures of 2,500 to 3,000 ETH earlier this year.
Such a decline in burn rate is not merely a statistical anomaly, but a reflection of broader shifts within the Ethereum network.
An important factor contributing to the reduced gas rates is the increase migration of network operations to Layer 2 solutionsthat improve transaction speeds while reducing costs.
Moreover, innovations such as blob transactionsintroduced in Ethereum’s recent Dencun upgrade, further optimized fees on these secondary layers.
Notably, Blobs are a feature introduced to improve Ethereum’s compatibility with Layer 2 solutions such as zkSync, Optimism, and Arbitrum by efficiently managing data storage needs. This functionality is part of the Dencun upgrade, which integrates proto-dankhardening via EIP-4844.
While beneficial for lowering transaction costs, these technological advances also pose a challenge to Ethereum’s deflationary mechanisms.
This upgrade introduced a new fee structure in which a portion of each transaction fee, the base fee, is burned, potentially reducing the overall ETH supply. However, lower transaction costs have reduced expected deflationary pressures through Burning, indicating a shift towards a more inflationary trend in the near term.
According to Ultrasoundmoney, Ethereum’s supply dynamics have transitioned into a mildly inflationary mode with a growth rate of 0.498%. This shift could realign itself as network activity intensifies, leading to higher transaction costs and consequently higher burn rates.
Ethereum market reaction
Despite these underlying network dynamics, Ethereum’s market price has struggled to regain its previous highs above $3,500. The asset is trading around $3,085, reflecting a slight decline in recent weeks.
This price behavior underlines the broader market’s response to internal network changes and external economic factors, such as U.S. Securities and Exchange Commission (SEC) regulatory issues and macroeconomic uncertainties.
Looking ahead, the trajectory of Ethereum’s gas fees and subsequent ETH burn rate will be crucial in determining the sustainability of its economic model.
Featured image from Unsplash, chart from TradingView