March 27, 2024
Ethereum's fee reduction signals a pivotal shift
Latest Cryptocurrency News

Ethereum Faces Major Fee Reduction Challenge, Threatening ETH Supply Narrative – IntoTheBlock Report

According to a report by crypto data analytics firm IntoTheBlock, Ethereum is on the verge of entering a new phase characterized by a significant reduction in network revenue generated from transaction fees. This trend is posing a challenge to the deflationary supply narrative of Ethereum’s native token, ETH.

IntoTheBlock’s data reveals that the income generated by the Ethereum blockchain from network fees has reached its lowest point since April 2020, marking a substantial 90% decrease from the peak observed in May. During the bull market of the past few years, Ethereum users voiced concerns about exorbitant transaction costs, also known as gas fees, which were exacerbated by network congestion caused by the increased activity in non-fungible token (NFT) trading and decentralized finance (DeFi) yield farming. However, these issues have now become a thing of the past due to the decline in cryptocurrency prices, a drop in NFT demand, and a decrease in DeFi activity. The implementation of layer 2 solutions, designed to enhance Ethereum’s scalability and capacity, has also played a role in reducing fees, as noted in the report.

While the reduction in fees is advantageous for Ethereum users, who can now carry out transactions at a lower cost, it has implications for ETH’s supply. The decreased fee revenue is leading to a situation where fewer tokens are being burned compared to new issuance, which challenges Ethereum’s ultrasound money thesis, as pointed out by Lucas Outumuro, the head of research at IntoTheBlock.

Data reveals that over the last 30 days, the supply of ETH has increased by 33,500 ETH, equivalent to approximately $52 million, primarily due to reduced activity on the blockchain. Outumuro anticipates that network fee revenue will remain low as speculative activity wanes and users continue to migrate to Layer 2 solutions. For instance, in the report, it is highlighted that NFT trading, which was responsible for a significant portion of token burns in 2021 and early 2022, now accounts for only 8% of the total. This transition to a low-fee regime represents a significant shift for Ethereum, as it sacrifices high revenues and a deflationary supply in exchange for the potential to attract mainstream users through the use of layer 2 solutions, Outumuro added.

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