- Dramatic fee reduction follows the Dencun upgrade, which improved transaction efficiency but impacted the deflationary model.
- Last week saw a net increase in Ethereum’s supply with 18,064 tokens issued versus 7,729 burned.
Ethereum’s gas fees, have fallen to a historic low of 0.8 gwei. This decrease poses challenges for the network, as gas fees also help prevent spam by ensuring costs are associated with performing transactions.
Basefee right now at a multi year low of ~0.8 GWEI. 23.9 would be required to offset staking rewards. IMO Ethereum needs to get more L1 activity again and even if it sounds counterintuitive at such low rates, raising the gas limit can be part of a strategy. pic.twitter.com/RaTkzKOx1r
— Martin Köppelmann 🦉💳 (@koeppelmann) August 10, 2024
The structure of Ethereum’s gas fees is designed to reflect the network’s demand, with higher fees typically indicating higher usage. In contrast to the peak fees of $196 in May 2022, the current low fee suggests a significant drop in network demand.
This situation directly impacts the economic model of Ethereum, which utilizes gas fees as part of its deflationary mechanism, whereby tokens are “burned” or removed from circulation to help maintain the currency’s value.
The recent Dencun upgrade, which aimed to improve Ethereum’s scalability by introducing enhancements for faster and cheaper transactions, has contributed to the declining fees. While beneficial for users seeking lower costs, this has adversely affected the platform’s deflationary strategy.
Over the past week, the issuance of Ethereum tokens exceeded the number burned, leading to a net increase in supply—an inflationary indicator not typically associated with Ethereum’s economic model.
Analysis from Fidelity suggests this trend might continue, predicting more inflationary quarters for Ethereum if current conditions persist. Martin Köppelmann, co-founder of Gnosis, an Ethereum sidechain, suggests that a base fee of 23.9 gwei would be necessary to balance the economics of staking rewards with transaction costs.
“Ethereum needs to get more L1 activity again and even if it sounds counterintuitive at such low rates, raising the gas limit can be part of a strategy,” he added.
He proposes that increasing the gas limit, counterintuitive when rates are low, could help stimulate layer 1 (L1) activity on Ethereum.
This shift in Ethereum’s fee structure and its implications for network economics highlight the delicate balance between enhancing user accessibility through lower costs and maintaining a healthy economic model.
