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Upon a major transition, ETH is inflationary again
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This week we dive into an overlooked trend within Ethereum. We analyze the reasons behind the remarkably low fees being generated by Ethereum, their effects on ETHâs supply and their relevance towards the networkâs long-term future.
Network FeesâââSum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether
- Bitcoin fees increased slightly relative to last week
- Ethereum fees dropped by nearly a third in just a week, weâll be discussing this in more depth below
Exchanges NetflowsâââThe net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
- Exchange flows for both Bitcoin and Ether remain relatively negligible
Ethereum Fees Reach Multi-Year Lows
Demand for Ethereum Mainnet has been slowing down over the past few months. Driven by the migration to layer 2s and the decreasing usage of applications in Mainnet, fees on Ethereum reached their lowest since April 2020.
Via ITBâs Ethereum network indicators
3-Year LowâââFees on Ethereum Mainnet reached their lowest since before DeFi Summer in 2020
- Last week Ethereum averaged 1.38k ETH worth of fees/day, and is currently on track for just 1.19k this week ahead of the weekend when fees usually reach their lowest
- Fees are down 90% from their highs this May and approximately 50% lower than they were last October
The decrease in fees is putting ETHâs âultra sound moneyâ thesis to a test.
Via ITBâs Ethereum supply indicators
Inflationary AgainâââEtherâs supply is slowly trending upwards
- September was the first month since December 2022 where ETHâs supply grew
- There are two reasons behind Etherâs inflationary trend: low fees and higher supply issuance
- The multi-year low levels of fees on Ethereum have led to less ETH being burnt, thus decreasing the deflationary pressure
- Additionally, the amount of ETH minted per day has been climbing as the amount of ETH staked continues to set new highs, leading to more inflationary rewards
- Despite being technically inflationary again, Etherâs net issuance for this week holds at around 0.44% annualized inflation, still 75% lower than Bitcoinâs current inflation rate
As we discussed in the Q3 on-chain review, the transition of activity to layer 2s on Ethereum has been one of the main reasons behind its decreasing fees. Another reason is the dwindling volumes from NFT collections.
Via ITBâs NFTÂ insights
NFT Bear Market Impacts FeesâââAs NFT volumes remain lower, Ethereum loses one if its main fee contributors
- In 2021 and early 2022, NFTs used to be the largest category of application burning fees on Ethereum
- This week NFTs contributed to just 8% of the ETH being burnt, per ultrasound.money
- With average gas fees at their lowest since September 2020, the cost of minting or trading NFTs on Ethereum Mainnet are a fraction of what they used to be; yet users donât seem to care as shown by the stagnant volume figures
As speculative activity on L1 disappears and L2s continue to grow, Ethereum fees are likely to remain low. The upcoming introduction of EIP-4844 may further accelerate this trend as it is expected to decrease L2 fees by an order of magnitude.
Ultimately, the low fee regime represents a major transition for Ethereum, trading off high revenues and deflationary supply for the promise to be able to attract mainstream users through layer 2s.
Ethereum Fees Reach Multi-Year Lows was originally published in IntoTheBlock on Medium, where people are continuing the conversation by highlighting and responding to this story.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.