In August, Ethereum is taking a notable hit to its reputation for being “ultra sound money.” This month could record the lowest in fee generation on the Ethereum mainnet since early 2020, according to analyst Thor Hartvigsen.
This development comes after the introduction of blobs in March, which sliced the fees to the Ethereum network from L2 drastically. As expected, most transaction activity has now moved into the rollups, with significant value capture shifting to the execution layer for the L2 solutions.
The consequence of this shift is that Ethereum (ETH) has been passing from a surplus-deflationary to a net inflationary model, thus with a yearly inflation rate of around 0.7%. The inflation rate here outstrips the deflationary effect of Ethereum’s burn mechanism which has led to a situation whereby the holders of ETH are worried that the “ultra-sound money” narrative may no longer be applicable.
Factors Influencing Ethereum Supply Dynamics
In analyzing the evolution of ETH supply, a few elements come in view: base fees, blob fees, priority fees, miner extractable value (MEV), and ETH emissions. Base fees and blob fees are burned, which in theory, good for all ETH holders. But the truth is, blob fees are usually the least.
Priority fees and MEV are channeled to validators and stakers, rewarding only those who effectively take part in staking. Likewise, by directing these ETH emissions to validators and stakers, inflation is created thereby devaluing the non-stakers’ share.
ETH holders benefit from better fee movement. They profit from sludge and basic fee burns, but unfortunately, priority fees and MEV don’t belong to them. The issue of ETH emissions decreases their share, and the non-holders’ losses become clear when blobs come into play. This is because now the emissions exceed the burn rate.
On the other hand, ETH stakers are the ones to benefit from the whole fee burning or the staking yields. Even though their fee share dropped by over 90% this year, they are still neutral due to emissions being balanced by staking rewards minus validator commissions.
Ethereum’s shift from the deflationary model is quite a practical change. It was clear that transaction charges made on the main net were not working, but the practicality has enhanced even though there is Layer 2 fragmentation.
Even though the non-stakers have lower inflation than other Layer 1’s, Ethereum is at a state where shrinking profits in a sea of inflation is the normal. It is still very tough to combine low charges with the need to make profits from the network.
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