Ethereum (ETH), which has been referred to as a supercoin due to its deflationary view, now appears to be facing new challenges that have led some analysts to question whether that narrative still holds.
Prominent cryptocurrency analyst Thor Hartvigsen recently highlighted this issue in a detailed report. mail In X, where he discussed the current state of fee generation and supply dynamics on Ethereum.
Is ETH no longer UltraSound’s coin?
Hartvigsen noted that August 2024 “will be the worst month in terms of fees generated on the Ethereum mainnet since early 2020.” This decline is largely due to the introduction of blocks in March, which allowed layer 2 (L2) solutions to bypass paying large fees to Ethereum and Ethereum holders.
As a result, a significant amount of activity has moved from the mainnet to Layer 2 (L2) solutions, with most of the value at the execution layer being captured by the L2 solutions themselves.
As a result, Ethereum has become net inflationary, with an annual inflation rate of around 0.7%, meaning that new Ethereum is currently being issued more than the amount being burned through transaction fees.
Hartvigsen revealed the impact on both non-participants and participants: According to the analyst, non-participants primarily benefit from the Ethereum burn mechanism, where base fees and block fees are burned, reducing the total supply of ETH.
However, with block fees often being zero and base fee generation low, non-participants see less benefit from these burns. At the same time, non-participants do not directly benefit from priority fees and mining extraction value (MEV), which are not burned but distributed to validators and participants.
Additionally, the ETH emissions flowing to validators/participants have an inflationary effect on the supply, negatively impacting non-participants. As a result, the net flow of non-participants turns inflationary, especially after blocks are submitted.
For investors, the situation is somewhat different. Hartvigsen revealed that investors receive all fees, either through burning or through return on investment, meaning that the net impact of ETH emissions is neutral for them.
However, despite this advantage, participants have also seen a significant reduction in fees flowing to them, by over 90% since earlier this year.
This decline raises questions about the sustainability of Ethereum’s meta-money narrative. To answer this question, Hartvigsen spoke
Ethereum no longer carries the super money narrative which is probably for the best.
What’s next for Ethereum?
By now, it is quite clear with current trends that the Ethereum supercoin story may not be as compelling as it once was.
With fees down and inflation slightly outpacing burn, Ethereum is now more comparable to other layer 1 (L1) blockchains like Solana and Avalanche, which are also facing similar inflationary pressures, Hartvigsen says.
Hartvigsen points out that while 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.
One possible solution discussed by the analyst is to increase the fees that L2s pays to Ethereum, although this could pose competitive challenges. Concluding the post, Hartvigsen noted:
Looking at it from a broader perspective, base layers are generally unprofitable (one study suggests Celestia generates about $100 in daily revenue), especially if we consider inflation as a cost. Ethereum is no longer a net deflationary anomaly, and like other base layers, requires another way to evaluate it.
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