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- Ethereum’s Dencun upgrade significantly reduced Layer 2 transaction costs, leading to a surge in network activity.
- Lower transaction fees on Ethereum have reversed its deflationary trend, causing new inflationary pressures on the supply.
Transaction fees on the Ethereum mainnet dropped to an all-time low after the Dencun release. This update’s main component was the application of EIP-4844, which cuts Layer 2 (L2) transaction fees by 10x.
With networks like Optimism, Arbitrum, and Base becoming the preferred alternative for consumers looking for lower transaction costs, this fee reduction has resulted in a significant explosion in transaction activity on L2.
Post-Dencun, Ethereum Mainnet fees hit an all-time low as L2 transactions surged. EIP-4844 slashed L2 costs by 10x, driving record activity.
But with fewer fees burned, $ETH has turned inflationary, reversing its recent deflationary trend. pic.twitter.com/W3p0xuKRXe
— IntoTheBlock (@intotheblock) October 6, 2024
Transitioning to Layer 2 Brings Efficiency, But Raises Inflation Concerns for Ethereum
Benefiting in transaction speed and efficiency, this has caused activity to change from Layer 1 to Layer 2. Still, the effects of these reduced costs go beyond simply more activity. The amount of ETH burned has also dropped dramatically since transaction fees have dropped.
Because of the burning mechanism made possible by high transaction fees—where some of the fees were burned—Ethereum was previously in a deflationary trend. Ethereum has now turned from a deflationary tendency to an inflationary trend as burning activity declines, therefore increasing the volume of ETH at a higher rate than ever before.
Although the long-term effects of this update are not yet unknown, many believe that Ethereum’s scalability has been greatly improved by the rise in L2 activity. Some are starting to question how Ethereum might strike network efficiency against inflationary pressures as transaction fees fall and network activity rises.
While inflationary pressures on ETH are a huge issue for investors, L2 usage keeps rising since these solutions let users complete transactions faster at much reduced prices.
A prior CNF report noted that transaction fees on Ethereum topped $45 million at one point, suggesting that network activity is still rapidly increasing among this rise in activity.
Although on-chain activity has increased, some mixed signals—that of large outflows into Ethereum ETFs—have been observed, implying that although optimism still exists, there are worries over the possible influence of inflation on the ETH value.
Meanwhile, as of writing, ETH is trading at $2,488.01, up 2.48% over the last 24 hours. Its market cap comes close to $300 billion.
