According to U.Today, the Ethereum network has transitioned from a deflationary to an inflationary status following the Dencun upgrade earlier this year. The upgrade, a combination of the Cancun and Deneb updates, was designed to enhance scalability and reduce transaction fees. It introduced Proto-Danksharding and temporary data blobs for cheaper layer-2 roll-up storage. However, recent analysis from on-chain data firm CryptoQuant suggests that this upgrade has inadvertently led to Ethereum becoming inflationary again.
CryptoQuant's analysis indicates that the Dencun upgrade has resulted in a structurally lower amount of transaction fees being burned on Ethereum, which has not reduced the total supply of ETH enough to maintain its deflationary status. Historically, the total amount of fees burned has been directly correlated with higher network activity or the total number of transactions. Prior to the Dencun upgrade, increased network activity led to more fees being burned and consequently, a lower ETH supply. However, this correlation has been disrupted post the Dencun upgrade, with the total amount of fees burned no longer aligning with network activity.
CryptoQuant's Head of Research, Julio Moreno, noted that the Ethereum network underwent a structural change to the downside after the Dencun upgrade. Despite significant network activity, the median transaction fee and the total fees burned have significantly dropped. The Dencun upgrade not only reduced the transaction fees users pay but also decreased the total amount of fees that get burned. This has resulted in the total supply of ETH not decreasing enough to keep it deflationary. Consequently, the total amount of fees burned has reached its lowest point since the Merge Upgrade in September 2022, and the new supply of ETH has started to increase again, at the fastest daily rate since the Merge upgrade. This rapid increase in the new supply of ETH, coupled with the decrease in fees burned and the current rate of network activity, has led to the Ethereum network becoming inflationary.
