Ethereum supply dynamics and gas prices are shifting due to network upgrades and changing transaction volumes.
Ethereum, the world’s second-largest cryptocurrency by market capitalization, is currently facing intriguing supply dynamics. As transaction volumes in DeFi, NFT sales, and meme coin trading took a dip this year, Ethereum’s supply patterns have shifted, puzzling many.
Is Ethereum Becoming Scarce or Abundant?
It’s crucial to understand that Ethereum’s supply dynamic isn’t static. Depending on the time frame you consider, Ethereum’s nature changes. In a short span of a week, Ethereum appears to be getting rarer. However, if you expand that lens to a year, the cryptocurrency issues more than it consumes.
What’s causing this fluctuation? A significant factor is Ethereum’s connection with gas prices, which took a new turn in August 2021 with the implementation of EIP-1559. This update introduced a mechanism that burns fees, thereby tying Ethereum’s supply directly to gas prices. When gas prices soar, more Ethereum gets burned, and the opposite is true when they fall.
Following the EIP-1559 update, Ethereum underwent another significant change: the shift from a proof-of-work to a proof-of-stake model. This transition slashed the issuance rate of Ethereum by a whopping 90%. Many enthusiasts began touting Ethereum as “ultrasound money” post this change. However, with the recent drop in gas prices and transaction volume, this title is now under scrutiny.
Decoding the Drop in Gas Prices
Currently, an ETH transaction costs approximately $0.28, and making a trade on Uniswap comes with a $2.76 fee. This rate is significantly lower than the $4.17 price in early September and reminiscent of the rates post the FTX collapse in late 2022.
Chris Martin, the head of research at Amberdata, believes there are three primary reasons behind the drop in Ethereum gas prices. First and foremost, the Ethereum Foundation’s efforts in scaling Ethereum 2.0 have paid off, making the network more affordable and secure. Next, the rise in Layer-2 scaling solutions has effectively reduced the volume on the main chain. Finally, the broader crypto market is currently in a phase of uncertainty, with many stakeholders waiting for the next major trend or innovation.
Julio Barragan, the director of education at Blocknative, provides a different perspective. He suggests that this decline in gas prices might be a temporary phase. According to him, once transaction volume starts to increase, the competition for block space will intensify, causing the network to recalibrate gas prices.
The Future of Ethereum Gas Prices
Predicting Ethereum’s gas prices has become more challenging, especially with the growing acceptance of ERC-4337, also known as account abstraction. This upgrade aims to simplify cryptocurrency wallets, making them as user-friendly as email accounts.
Barragan is uncertain about the long-term implications of account abstraction and the increasing adoption of Layer-2 solutions on Ethereum’s gas prices. However, one thing is sure: lower fees can attract more users and amplify on-chain activity. Yet, a surge in users also means increased network congestion.
While Ethereum’s supply dynamics and gas prices continue to evolve, it’s evident that several factors play a role in shaping its trajectory. As the crypto ecosystem grows and changes, Ethereum’s behavior is something to keep a keen eye on.