#ETH Ether supply could be affected by Ethereum's Dencun upgrade, analyst says
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Ether supply could be impacted by the upcoming Dencun upgrade, according to an analyst.
The upgrade’s mainnet activation could come into effect as early as this March, the analyst said.
The supply of ether could be impacted by the Ethereum ETH -7.01%
network's upcoming Dencun upgrade, according to CoinShares Ethereum research associate Luke Nolan.
The Dencun upgrade will enable Layer 2 transactions to be sent to the Ethereum network through blobspace, an alternative to the current transactional calldata mechanism. This could result in reduced gas usage and, consequently, a lower amount of ether being burned.
All of the ether used to pay gas base fees for transactions is currently burned.
"Transactional calldata makes up 90% of the costs Layer 2s pay in terms of gas fees. But after the Dencun upgrade, instead of posting their data through calldata, Layer 2s can use the new blobspace mechanism, which has significantly lower gas costs. So, if we expect layer 2s to gradually shift to using this new blobspace mechanism, we could see gas prices settle at lower levels, which means less ether is burned," Nolan told The Block.
Impact on the ether burn mechanism
The possible reduction in ether burned could have an impact on the growth of ether supply.
"Gas demand on the Ethereum network drives ether's deflation mechanism via gas burn which can reduce the circulating supply of ether. The Dencun upgrade could see gas prices settle at lower levels," Nolan added.
However, the impact of the Dencun upgrade and the introduction of the blobspace mechanism could be mitigated by other factors. Nolan stressed that Layer 1 demand is what significantly drives deflation, and that "even very high blob usage has a low impact on circulating supply."
"Even if we see this reduced gas price because layer 2s are using the blobspace, there is no real concern that Ethereum will become significantly inflationary.
