Ethereum (ETH) Return to Inflation Amid Plummeting Revenues
As Ethereum experiences a resurgence of inflation amid a shifting landscape of network activity, analysts warn of potential implications for the price of ETH. Gas fees on the Ethereum network, which represent the level of utilization, have plummeted by over 9% this week, reaching a nine-month low of $22.1 million, according to data from IntoTheBlock.
This decline has led to an uptick in the total supply of ETH, Ethereum’s native cryptocurrency, as fewer ETH are burned for transaction verification, as reported by Ultrasound.money.
One of the primary drivers of this shift is the rising prominence of Layer 2 solutions, as activities on the Ethereum network migrate to scaling solutions like Arbitrum, Optimism, and Base. Lucas Outumuro, a researcher at IntoTheBlock, believes this trend will persist in the short term.
“This trend will put pressure on the second-largest cryptocurrency by market capitalization as the supply begins to increase over the past month,” IntoTheBlock noted.
Following the upgrade known as “The Merge” in September 2022, Ethereum transitioned into a state of reduced inflation by switching from the Proof-of-Work mechanism to Proof-of-Stake and altering its distribution mechanism.
During periods of network congestion, more ETH is burned than created, effectively reducing the supply and driving up the price of ETH. However, this trend is reversed when network demand decreases.
JPMorgan has expressed skepticism that the Shanghai upgrade has been able to stimulate network activity. The number of transactions, active addresses, and Total Value Locked (TVL) within the ecosystem have significantly decreased since April. Matrixport, a cryptocurrency service provider, predicts that ETH could drop to $1,000 if “revenues unexpectedly plummet.”
While Ethereum’s transition to a Proof-of-Stake model was seen as a step towards addressing scalability and sustainability concerns, the network’s recent shift towards inflation raises questions about its long-term stability and the impact on ETH’s value.
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