The reigning champion of alternative cryptocurrencies, Ethereum (ETH), is currently experiencing a significant decline in the daily amount of ETH being burned. This drop is primarily attributed to a major decrease in network gas, or transaction fees, which has resulted in the lowest level of burned ETH seen all year. Presently, transaction fees on the Ethereum network are fluctuating between 5 to 10 gwei, marking the lowest levels observed in the past year.
The decline in transaction fees has directly impacted the amount of ETH being burned on the Ethereum network. On-chain data reveals that on May 5th, only 610 ETH were burned, setting a record low for the year due to the minimal transaction fees. In contrast, during the first four months of the year, the daily amount of burned ETH generally remained above 2,500 to 3,000 ETH.
The ongoing decrease in transaction fees on the Ethereum network can be attributed to several factors, including the shift in usage to Layer 2 scaling solutions and the increasing adoption of blob transactions introduced in March with the Dencun update. These developments have effectively reduced transaction fees on Layer 2s.
Transaction fees and the dynamics of ETH burning are critical aspects of the Ethereum network’s economic model. While lower transaction fees are beneficial for network users, the recent drop in ETH burning has had a negative impact on the deflationary nature of Ethereum, which is a key characteristic of this leading altcoin.
The game changed with the implementation of the London update, also known as EIP-1559, in August 2021. This update fundamentally altered the fee structure of the Ethereum network. It introduced a base transaction fee that is burned and a priority fee that functions as a tip for validators. The base transaction fee, which is directly linked to network usage, means that higher transaction fees result in a greater amount of ETH being removed from circulation through token burning.
According to data from Ultrasound.money, the ETH supply shifted from its previous deflationary state to an inflationary state last week, with a supply growth rate of 0.49%. However, if network activity increases and more ETH is burned than issued, Ethereum could potentially return to a deflationary state.
Disclaimer: The information provided in this article should not be considered investment advice. Investors should be aware that cryptocurrencies are highly volatile and carry inherent risks. It is advisable to conduct thorough research before making any investment decisions.