Ethereum’s Fee Decline Challenges its ‘Ultra Sound Money’ Proposition

Ethereum, a leading blockchain platform, is witnessing a significant drop in network revenue from fees, which could challenge its deflationary supply narrative for its native token, ether (ETH), as highlighted by crypto analytics firm IntoTheBlock.

According to data from IntoTheBlock, Ethereum’s income from network fees has plummeted to its lowest since April 2020, marking a 90% decline from its peak in May.

Historically, Ethereum users have grappled with high transaction costs, commonly referred to as gas fees, especially during the bull market. The network often faced congestion due to the surge in non-fungible token (NFT) trading and decentralized finance (DeFi) yield farming. However, with the recent downturn in cryptocurrency prices, the demand for NFTs has waned, and DeFi activity has seen a significant drop.

Another factor contributing to the reduction in fees is the rise of layer 2 solutions, designed to enhance Ethereum’s scalability and throughput. While this development is a boon for users, enabling them to transact at lower costs, it has implications for ETH’s supply dynamics. With reduced fees, fewer tokens are burned, leading to a more inflationary environment than new token issuance.

Lucas Outumuro, Head of Research at IntoTheBlock, commented on the situation, stating, “The decrease in fees is putting ETH’s ‘ultra sound money’ thesis to a test.”

Data indicates that over the past month, the supply of ETH tokens has increased by 33,500 ETH, equivalent to approximately $52 million, primarily due to diminished blockchain activity.

Outumuro anticipates that network fee revenue will remain subdued as speculative activities decrease and users increasingly shift to layer 2 solutions. He noted that while NFT trading was a significant contributor to token burns in 2021 and early 2022, it accounted for a mere 8% last week.

Outumuro concluded, “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.”

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