Ethereum
What this means for the future of ETH — TradingView News
In recent weeks, Ethereum has shown subtle signs of recovery amid a generally bearish crypto market, with the altcoin mimicking Bitcoin’s modest uptrend.
Although Ethereum’s price rose slightly by 0.2% over the past 24 hours, a parallel trend that could significantly affect Ethereum’s business model has been developing beneath the surface.
Declining Network Activity Reduces ETH Consumption
In April, Ethereum’s ETH consumption rate hit a yearly low, primarily due to a significant decrease in transaction fees on the network.
These fees have generally fluctuated just below 10 gwei this year, but in recent weeks they have dropped to some of the lowest levels, directly influencing the rate at which ETH is burned.
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This reduction in burn rate is highlighted by the sharp decline in daily ETH burned, which reached a low of 671 ETH over the past day, a notable decrease from the daily figures of 2,500-3,000 ETH seen earlier in the year.
Such a drop in burn rate is not simply a statistical anomaly but a reflection of broader changes within the Ethereum network.
A significant factor contributing to lower gas fees is the increased migration of network activities to Layer 2 solutions, which improve transaction speed while reducing costs.
Additionally, innovations such as blob transactions, introduced in Ethereum’s recent Dencun upgrade, have further optimized costs 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 feature is part of the Dencun upgrade, which integrates proto-danksharding via EIP-4844.
While beneficial for reducing transaction fees, these technological advances pose challenges to Ethereum’s deflationary mechanisms.
This upgrade introduced a new fee structure where a portion of each transaction fee, the base fee, is burned, potentially reducing the overall supply of ETH. However, with transaction fees decreasing, the expected deflationary pressure via burning has eased, signaling a shift towards a more inflationary trend in the near term.
According to Ultrasoundmoney, Ethereum’s supply dynamics have shifted to a slightly inflationary mode with a growth rate of 0.498%. This shift could realign if network activity increases, leading to increased transaction fees and, therefore, higher consumption rates.
Ethereum Market Response
Despite this underlying network dynamic, Ethereum’s market price has struggled to regain its former highs above $3,500. The asset is trading around $3,085, reflecting a slight slowdown in recent weeks.
This price behavior underscores the broader market reaction to internal network changes and external economic factors, such as U.S. Securities and Exchange Commission (SEC) regulatory struggles and macroeconomic uncertainties.
Going forward, the trajectory of Ethereum’s gas fees and the subsequent burn rate of ETH will be crucial in determining the sustainability of its business model.
Featured image from Unsplash, chart from TradingView