Ethereum (ETH), the king of altcoins, is experiencing a significant decrease in the amount of ETH burned daily, primarily due to a major drop in network gas or transaction fees. This has resulted in the lowest level of burned ETH this year. Currently, transaction fees on the Ethereum network are fluctuating between 5 to 10 gwei, which is the lowest it has been all year.
The decline in transaction fees has led to a decrease in the amount of ETH being burned. On May 5th, only 610 ETH was burned, which is a record low for this year due to the minimal transaction fees. In contrast, during the first four months of the year, the daily amount of ETH burned was consistently above 2,500 to 3,000 ETH.
The decrease in transaction fees can be attributed to the shift in usage to Layer 2 scaling solutions and the increasing adoption of blob transactions introduced in March with the Dencun update. These developments have helped reduce transaction fees on Layer 2s.
Transaction fees and ETH burning dynamics are important factors in the network’s economic model. While lower transaction fees are beneficial for network users, the recent drop in ETH burning has a negative impact on the deflationary nature of Ethereum.
However, everything changed with the London update, also known as EIP-1559, which was implemented in August 2021. This update fundamentally changed the fee structure of the Ethereum network. It introduced a base transaction fee that is burned and a priority fee that acts as a tip for validators. The base transaction fee is directly linked to network usage, meaning that higher transaction fees result in more ETH being removed from circulation through token burning.
According to data from Ultrasound.money, last week the ETH supply shifted from a deflationary structure to an inflationary state, with a supply growth rate of 0.49%. However, if network activity increases and more ETH is burned than issued, Ethereum could return to a deflationary state.
Disclaimer: The information in this article should not be considered investment advice. Investors should be aware of the high volatility and risks associated with cryptocurrencies and conduct their own research.
