Ethereum (ETH) which is addressed as the ultra-sound currency due to its deflationary supply method, is now facing new challenges which has led some analysts to question whether this statement is still valid.
Thor Hartvigsen, a prominent crypto analyst, recently highlighted the issue in a detailed article. Post on X, where he discussed the current state of Ethereum’s fee generation and supply dynamics.
Is ETH no longer an ultra-sound currency?
Hartvigsen pointed out that August 2024 “is set to be the worst month in terms of fees generated on the Ethereum mainnet since the beginning of 2020.” This decline is largely due to the introduction of blobs in March, which allowed Layer 2 (L2) solutions to avoid paying significant fees to Ethereum and ETH holders.
As a result, most activity has shifted from the mainnet to these layer two (L2) solutions, with most of the value captured by L2 at the execution level.
As a result, Ethereum has become net inflationary, with an annual inflation rate of around 0.7%, meaning that the issuance of new ETH currently exceeds the amount being burned through transaction fees.
Hartvigsen revealed its impact on non-stakers and stakers: According to the analyst, non-stakers mainly benefit from Ethereum’s burn mechanism, where base fees and blob fees are burned, reducing the overall supply of ETH.
However, with blob fees often at $0 and base fee generation reduced, non-stakers are receiving less benefit from these burns. Also, priority fees and miner extractable value (MEV), which are not burned but instead distributed to validators and stakers, do not directly benefit non-stakers.
Additionally, ETH emissions that validators/stakers receive have an inflationary effect on the supply, which negatively impacts non-stakers. As a result, the net flow to non-stakers has become inflationary, especially after the introduction of blobs.
For stakers, the situation is somewhat different. Hartvigsen revealed that stakers capture all fees either through burns or through staking yield, meaning that the net effect of ETH emissions is neutralized for them.
However, despite this gain, the fees received by stakers have also seen a significant drop, down by more than 90% since the beginning of this year.
This decline raises questions about the sustainability of the ultra-sound money narrative for Ethereum. To answer this, Hartvigsen said
Ethereum no longer holds the ultra sound money narrative which is probably for the better.
What’s next for Ethereum?
So far, it is clear from the current trends that Ethereum’s ultra-sound money narrative is no longer as attractive as it used to be.
Hartvigsen says that with the reduction in fees and a slight acceleration in inflation, Ethereum is now more comparable with other Layer 1 (L1) blockchains like Solana and Avalanche, which face similar inflationary pressures.
Hartvigsen added that although Ethereum’s current net inflation rate of 0.7% per year is still significantly lower than other L1s, the declining profitability of infrastructure layers like Ethereum may require a new approach to maintain the network’s value proposition.
A possible solution the analyst discussed is to increase the fees L2 pays to Ethereum, although this could create competitive challenges. Concluding the post, Hartvigsen said:
Zooming out, infra-layers are generally unprofitable (study Celestia which generates ~$100 in revenue per day), especially if inflation is seen as a cost. Ethereum is no longer an outlier with a pure deflationary supply and, like other infra-layers, needs another way to be valued.
Featured image created by DALL-E, chart from TradingView
