- Ethereum’s supply dynamics vary over different timeframes, from deflationary to inflationary.
- Factors like EIP-1559, Layer-2 scaling, and market narratives influence gas prices.
- The adoption of ERC-4337 and account abstraction adds an element of uncertainty.
The Ethereum network has witnessed dynamic shifts in its supply dynamics, driven by the fluctuations in the DeFi, NFT sales, and meme coin trading sectors throughout this year. Depending on the timeframe considered, Ethereum can exhibit both deflationary and inflationary characteristics: over a seven-day period, Ethereum becomes scarcer, while over a yearly timeframe, it issues more ETH than it burns.
This raises questions about the network’s supply dynamics, the reasons behind the drop in transaction fees, and the future outlook for Ethereum.
In August 2021, Ethereum implemented EIP-1559, introducing a fee-burning mechanism. Since then, the supply has been directly linked to gas prices, where higher gas prices result in more ETH being burned and vice versa. This development paved the way for the transition to Ethereum 2.0 last year, reducing the issuance of ETH by 90% and leading many to label it as “ultrasound money.”
However, this label has faced challenges due to decreasing gas prices and reduced transaction volume. Transaction fees currently stand at around $0.28 for sending ETH across the protocol, with a Uniswap trade costing $2.76, a notable drop from the $4.17 price seen in early September and a level not observed since the FTX collapse in late 2022.
Chris Martin, head of research at Amberdata, outlined three reasons for the decline in gas prices. First, he attributed it to the Ethereum Foundation’s focus on scaling with Ethereum 2.0, making the network more cost-effective and secure. Second, he highlighted the growth of Layer-2 scaling solutions, which have shifted a significant portion of the transaction volume away from the mainchain. Third, he pointed to a lack of a compelling narrative in the broader crypto market, which has left many waiting for the next significant development.
Julio Barragan, director of education at Blocknative, believes that the current gas situation is temporary. He anticipates that when transaction volume picks up, competition for block space will increase, leading to an automatic adjustment of gas prices by the network.
Looking ahead, Barragan sees the future of Ethereum gas prices as uncertain. He noted that the gradual adoption of ERC-4337, also known as account abstraction, aims to make crypto wallets as user-friendly as email. However, its long-term impact on gas prices and supply remains unclear. He concluded that lower fees may attract more users and activity on-chain but could also lead to increased congestion in the network.
Disclaimer: Please note that the viewpoints and perspectives expressed by the author, as well as any individuals referenced in this article, are intended solely for informational purposes. They should not be construed as financial or investment advice. It’s important to acknowledge that investing in or trading cryptoassets carries inherent financial risks.